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 June 30, 2004
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 1-31447
CENTERPOINT ENERGY, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-0694415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-1111
(Address and zip code of (Registrant's telephone number,
principal executive offices) including area code)
----------
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 in Rule 12b-2 of the Exchange Act). Yes |X| No | |
As of August 1, 2004, CenterPoint Energy, Inc. had 307,542,381 shares of common
stock outstanding, excluding 166 shares held as treasury stock.
CENTERPOINT ENERGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................1
Statements of Consolidated Income
Three Months and Six Months Ended June 30, 2003 and 2004 (unaudited)................1
Consolidated Balance Sheets
December 31, 2003 and June 30, 2004 (unaudited).....................................2
Statements of Consolidated Cash Flows
Six Months Ended June 30, 2003 and 2004 (unaudited).................................4
Notes to Unaudited Consolidated Financial Statements.....................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations of CenterPoint Energy and Subsidiaries.......................................25
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................42
Item 4. Controls and Procedures.............................................................44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................45
Item 4. Submission of Matters to a Vote of Security Holders.................................45
Item 6. Exhibits and Reports on Form 8-K....................................................46
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From time to time, we make statements concerning our expectations,
beliefs, plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements, that are not historical facts.
These statements are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those expressed or implied by these statements. You can
generally identify our forward-looking statements by the words "anticipate,"
"believe," "continue," "could," "estimate," "expect," "forecast," "goal,"
"intend," "may," "objective," "plan," "potential," "predict," "projection,"
"should," "will," or other similar words.
We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.
The following are some of the factors that could cause actual results to
differ materially from those expressed or implied in forward-looking statements:
- - the timing and outcome of the regulatory process related to the 1999 Texas
Electric Choice Law leading to the determination and recovery of the
true-up components and the securitization of these amounts;
- - the successful consummation and the timing of the sale of our interest in
Texas Genco Holdings, Inc. (Texas Genco);
- - nonperformance by the counterparty to the master power purchase and sale
agreement a subsidiary of Texas Genco, Texas Genco, LP, entered into in
connection with the sale of our interest in Texas Genco;
- - state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation and restructuring of the electric
utility industry, constraints placed on our activities or business by the
Public Utility Holding Company Act of 1935, as amended (1935 Act), changes
in or application of laws or regulations applicable to other aspects of
our business and actions with respect to:
- allowed rates of return;
- rate structures;
- recovery of investments; and
- operation and construction of facilities;
- - industrial, commercial and residential growth in our service territory and
changes in market demand and demographic patterns;
- - the timing and extent of changes in commodity prices, particularly natural
gas;
- - changes in interest rates or rates of inflation;
- - 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 cost of such capital, receipt of certain approvals under the 1935 Act,
and the results of our financing and refinancing efforts, including
availability of funds in the debt capital markets;
- - actions by rating agencies;
- - inability of various counterparties to meet their obligations to us;
ii
- - non-payment for our services due to financial distress of our customers,
including Reliant Energy, Inc. (formerly named Reliant Resources, Inc.)
(RRI);
- - the outcome of the pending lawsuits against us, Reliant Energy,
Incorporated and RRI;
- - the ability of RRI to satisfy its obligations to us, including indemnity
obligations and obligations to pay the "price to beat" clawback; and
- - other factors we discuss in "Risk Factors" beginning on page 26 of the
CenterPoint Energy, Inc. Annual Report on Form 10-K for the year ended
December 31, 2003.
Additional risk factors are described in other documents we file with the
Securities and Exchange Commission.
You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
REVENUES ............................................................... $ 2,090,900 $ 2,241,177 $ 4,991,068 $ 5,200,364
----------- ----------- ----------- -----------
EXPENSES:
Fuel and cost of gas sold ............................................ 1,080,857 1,264,655 2,940,003 3,206,913
Purchased power ...................................................... 22,974 18,098 34,968 26,368
Operation and maintenance ............................................ 393,085 391,373 805,961 801,985
Depreciation and amortization ........................................ 157,263 160,681 309,544 317,268
Taxes other than income taxes ........................................ 90,691 98,297 193,535 204,542
----------- ----------- ----------- -----------
Total ............................................................ 1,744,870 1,933,104 4,284,011 4,557,076
----------- ----------- ----------- -----------
OPERATING INCOME ....................................................... 346,030 308,073 707,057 643,288
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain (loss) on Time Warner investment ................................ 113,178 15,581 64,704 (8,872)
Gain (loss) on indexed debt securities ............................... (98,253) (17,891) (55,550) 9,123
Interest and other finance charges ................................... (219,150) (200,803) (447,194) (395,555)
Interest on transition bonds ......................................... (9,836) (9,547) (19,684) (19,221)
Other, net ........................................................... 1,629 15,731 4,788 17,555
----------- ----------- ----------- -----------
Total ............................................................ (212,432) (196,929) (452,936) (396,970)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY
INTEREST AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE .................. 133,598 111,144 254,121 246,318
Income Tax Expense ................................................... (44,346) (38,243) (85,455) (88,240)
Minority Interest .................................................... (6,295) (15,249) (4,229) (26,839)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .................................................... 82,957 57,652 164,437 131,239
DISCONTINUED OPERATIONS:
Loss from Other Operations, net of tax ............................. (403) -- (865) --
Loss on Disposal of Other Operations, net of tax .................. (19,331) -- (11,989) --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX .................... -- -- 80,072 --
----------- ----------- ----------- -----------
NET INCOME ............................................................. $ 63,223 $ 57,652 $ 231,655 $ 131,239
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Income from Continuing Operations before Cumulative Effect of
Accounting Change .................................................. $ 0.27 $ 0.19 $ 0.54 $ 0.43
Discontinued Operations:
Loss from Other Operations, net of tax ............................. -- -- -- --
Loss on Disposal of Other Operations, net of tax ................... (0.06) -- (0.04) --
Cumulative Effect of Accounting Change, net of tax ................... -- -- 0.27 --
----------- ----------- ----------- -----------
Net Income ........................................................... $ 0.21 $ 0.19 $ 0.77 $ 0.43
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income from Continuing Operations before Cumulative Effect of
Accounting Change .................................................. $ 0.27 $ 0.19 $ 0.54 $ 0.42
Discontinued Operations:
Loss from Other Operations, net of tax ............................. -- -- -- --
Loss on Disposal of Other Operations, net of tax .................. (0.06) -- (0.04) --
Cumulative Effect of Accounting Change, net of tax ................... -- -- 0.26 --
----------- ----------- ----------- -----------
Net Income ........................................................... $ 0.21 $ 0.19 $ 0.76 $ 0.42
=========== =========== =========== ===========
See Notes to the Company's Interim Financial Statements
1
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
DECEMBER 31, JUNE 30,
2003 2004
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 131,480 $ 280,912
Investment in Time Warner common stock ............... 389,302 380,427
Accounts receivable, net ............................. 636,646 508,689
Accrued unbilled revenues ............................ 395,351 192,587
Fuel stock ........................................... 237,650 207,497
Materials and supplies ............................... 175,276 170,410
Non-trading derivative assets ........................ 45,897 59,620
Taxes receivable ..................................... 159,646 143,558
Prepaid expenses and other current assets ............ 101,457 86,411
------------ ------------
Total current assets ............................... 2,272,705 2,030,111
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ........................ 20,005,437 20,212,237
Less accumulated depreciation and amortization ....... (8,193,901) (8,416,735)
------------ ------------
Property, plant and equipment, net ................. 11,811,536 11,795,502
------------ ------------
OTHER ASSETS:
Goodwill, net ........................................ 1,740,510 1,740,510
Other intangibles, net ............................... 79,936 78,839
Regulatory assets .................................... 4,930,793 4,959,059
Non-trading derivative assets ........................ 11,273 16,849
Other ................................................ 529,911 531,494
------------ ------------
Total other assets ................................. 7,292,423 7,326,751
------------ ------------
TOTAL ASSETS ..................................... $ 21,376,664 $ 21,152,364
============ ============
See Notes to the Company's Interim Financial Statements
2
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
2003 2004
------------ ------------
CURRENT LIABILITIES:
Short-term borrowings ................................................... $ 63,000 $ --
Current portion of transition bond long-term debt ....................... 41,189 43,099
Current portion of other long-term debt ................................. 121,234 164,669
Indexed debt securities derivative ...................................... 321,352 312,227
Accounts payable ........................................................ 694,558 606,446
Taxes accrued ........................................................... 193,273 126,121
Interest accrued ........................................................ 164,669 178,791
Non-trading derivative liabilities ...................................... 8,036 5,586
Regulatory liabilities .................................................. 186,239 191,785
Accumulated deferred income taxes, net .................................. 345,870 347,303
Deferred revenues ....................................................... 88,740 114,093
Other ................................................................... 290,176 284,836
------------ ------------
Total current liabilities ............................................. 2,518,336 2,374,956
------------ ------------
OTHER LIABILITIES:
Accumulated deferred income taxes, net .................................. 3,010,577 3,070,022
Unamortized investment tax credits ...................................... 211,731 202,209
Non-trading derivative liabilities ...................................... 3,330 1,654
Benefit obligations ..................................................... 836,459 875,368
Regulatory liabilities .................................................. 1,358,030 1,254,318
Other ................................................................... 715,670 707,112
------------ ------------
Total other liabilities ............................................... 6,135,797 6,110,683
------------ ------------
LONG-TERM DEBT:
Transition bonds ........................................................ 675,665 659,773
Other ................................................................... 10,107,399 9,941,314
------------ ------------
Total long-term debt .................................................. 10,783,064 10,601,087
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 11)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ............................ 178,910 198,131
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock (305,385,434 shares and 307,434,559 shares outstanding
at December 31, 2003 and June 30, 2004, respectively) ................. 3,063 3,074
Additional paid-in capital .............................................. 2,868,416 2,885,593
Unearned ESOP stock ..................................................... (2,842) --
Retained deficit ........................................................ (700,033) (630,084)
Accumulated other comprehensive loss .................................... (408,047) (391,076)
------------ ------------
Total shareholders' equity ............................................ 1,760,557 1,867,507
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................... $ 21,376,664 $ 21,152,364
============ ============
See Notes to the Company's Interim Financial Statements
3
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------------
2003 2004
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 231,655 $ 131,239
Discontinued operations ................................................ 12,854 --
Cumulative effect of accounting change ................................ (80,072) --
----------- ---------
Income from continuing operations before cumulative effect of
accounting change .................................................... 164,437 131,239
Adjustments to reconcile income from continuing operations before
cumulative effect of accounting change to net cash provided by
operating activities:
Depreciation and amortization ........................................ 309,544 317,268
Fuel-related amortization ............................................ 9,725 13,201
Amortization of deferred financing costs ............................. 70,873 45,791
Deferred income taxes ................................................ 156,274 51,339
Investment tax credit ................................................ (8,685) (9,522)
Unrealized loss (gain) on Time Warner investment ..................... (64,704) 8,872
Unrealized loss (gain) on indexed debt securities .................... 55,550 (9,123)
Minority interest .................................................... 4,229 26,839
Changes in other assets and liabilities:
Accounts receivable and unbilled revenues, net ..................... 33,721 331,229
Inventory .......................................................... (15,542) 35,019
Taxes receivable ................................................... (30,941) 16,088
Accounts payable ................................................... (62,798) (88,112)
Fuel cost over (under) recovery/surcharge .......................... 6,827 17,180
Non-trading derivatives, net ....................................... (3,490) (9,847)
Interest and taxes accrued ......................................... (51,694) (53,057)
Net regulatory assets and liabilities .............................. (357,740) (157,728)
Other current assets ............................................... 15,168 15,046
Other current liabilities .......................................... (34,433) 2,837
Other assets ....................................................... (37,728) (17,425)
Other liabilities .................................................. 66,043 4,734
Other, net ........................................................... 17,534 18,492
----------- ---------
Net cash provided by operating activities ........................ 242,170 690,360
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................... (301,211) (246,851)
Other, net ............................................................. 1,937 (9,826)
----------- ---------
Net cash used in investing activities ............................ (299,274) (256,677)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term borrowing, net .................................. (347,000) (63,000)
Long-term revolving credit facility, net ............................... (1,459,000) 137,500
Proceeds from long-term debt ........................................... 2,882,267 231,564
Payments of long-term debt ............................................. (1,037,255) (514,706)
Debt issuance costs .................................................... (185,760) (13,505)
Payment of common stock dividends ...................................... (61,043) (61,366)
Payment of common stock dividends by subsidiary ........................ (7,615) (7,615)
Proceeds from issuance of common stock, net ............................ 4,504 6,879
Other, net ............................................................. 270 (2)
----------- ---------
Net cash used in financing activities .............................. (210,632) (284,251)
----------- ---------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS ............................. 13,619 --
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................... (254,117) 149,432
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................... 304,281 131,480
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 50,164 $ 280,912
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest ............................................................... $ 393,831 $ 365,799
Income taxes (refunds) ................................................. (35,742) 34,159
See Notes to the Company's Interim Financial Statements
4
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
General. Included in this Quarterly Report on Form 10-Q (Form 10-Q) of
CenterPoint Energy, Inc., together with its subsidiaries (collectively,
CenterPoint Energy or the Company), are CenterPoint Energy'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 CenterPoint Energy for the
year ended December 31, 2003 (CenterPoint Energy Form 10-K).
Background. CenterPoint Energy, Inc. is a public utility holding company,
created on August 31, 2002 as part of a corporate restructuring of Reliant
Energy, Incorporated (Reliant Energy) that implemented certain requirements of
the 1999 Texas Electric Choice Law (Texas electric restructuring law).
The Company's operating subsidiaries own and operate electric transmission
and distribution facilities, natural gas distribution facilities, natural gas
pipelines and electric generating plants. CenterPoint Energy is a registered
public utility holding company under the Public Utility Holding Company Act of
1935, as amended (1935 Act). The 1935 Act and related rules and regulations
impose a number of restrictions on the activities of the Company and those of
its subsidiaries. The 1935 Act, among other things, limits the ability of the
Company and its regulated subsidiaries to issue debt and equity securities
without prior authorization, restricts the source of dividend payments to
current and retained earnings without prior authorization, regulates sales and
acquisitions of certain assets and businesses and governs affiliate
transactions.
Texas Genco, LP, the wholly owned subsidiary of Texas Genco Holdings, Inc.
(Texas Genco) that owns and operates its electric generating plants, is an
exempt wholesale generator pursuant to an order of the Federal Energy Regulatory
Commission (FERC). As a result, Texas Genco, LP is exempt from all provisions of
the 1935 Act so long as it remains an exempt wholesale generator, and Texas
Genco is no longer a public utility holding company under the 1935 Act.
As of June 30, 2004, the Company's indirect wholly owned subsidiaries
included:
- CenterPoint Energy Houston Electric, LLC (CenterPoint Houston),
which engages in the electric transmission and distribution business
in a 5,000-square mile area of the Texas Gulf Coast that includes
Houston; and
- CenterPoint Energy Resources Corp. (CERC Corp., and, together with
its subsidiaries, CERC), which owns gas distribution systems.
Through wholly owned subsidiaries, CERC owns two interstate natural
gas pipelines and gas gathering systems and provides various
ancillary services.
CenterPoint Energy also has an approximately 81% ownership interest in
Texas Genco, which owns and operates a portfolio of generating assets located in
Texas. On July 21, 2004, the Company and Texas Genco announced a definitive
agreement for the sale of the Company's 81% ownership interest in Texas Genco.
For further discussion, see Note 15.
5
Basis of Presentation. The preparation of financial statements in
conformity with accounting principles generally accepted 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 Income are not
necessarily indicative of amounts expected for a full-year period due to the
effects of, among other things, (a) seasonal fluctuations in demand for energy
and energy services, (b) changes in energy commodity prices, (c) timing of
maintenance and other expenditures and (d) acquisitions and dispositions of
businesses, 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
net income.
Note 2(d) (Long-Lived Assets and Intangibles), Note 2(e) (Regulatory
Assets and Liabilities), Note 4 (Regulatory Matters), Note 5 (Derivative
Instruments), Note 7 (Indexed Debt Securities (ZENS) and Time Warner Securities)
and Note 12 (Commitments and Contingencies) to the consolidated annual financial
statements in the CenterPoint Energy Form 10-K relate to certain contingencies.
These notes, as updated herein, are incorporated herein by reference.
For information regarding certain legal and regulatory proceedings and
environmental matters, see Note 11 to the Interim Financial Statements.
(2) STOCK-BASED INCENTIVE COMPENSATION PLANS AND EMPLOYEE BENEFIT PLANS
(a) Stock-Based Incentive Compensation Plans.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123), and SFAS No. 148,
"Accounting for Stock-Based Compensation, Transition and Disclosure -- an
Amendment of SFAS No. 123," the Company applies the guidance contained in
Accounting Principles Board Opinion No. 25 and discloses the required pro-forma
effect on net income of the fair value based method of accounting for stock
compensation.
Pro-forma information for the three and six months ended June 30, 2003 and
2004 is provided to take into account the amortization of stock-based
compensation to expense on a straight-line basis over the vesting period. Had
compensation costs been determined as prescribed by SFAS No. 123, the Company's
net income and earnings per share would have been as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2004 2003 2004
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Income:
As reported ............................................. $ 63 $ 58 $ 232 $ 131
Total stock-based employee compensation determined
under the fair value based method ..................... (2) -- (6) (2)
-------- -------- -------- --------
Pro forma ............................................... $ 61 $ 58 $ 226 $ 129
======== ======== ======== ========
Basic Earnings Per Share:
As reported ............................................. $ 0.21 $ 0.19 $ 0.77 $ 0.43
Pro forma ............................................... $ 0.20 $ 0.19 $ 0.75 $ 0.42
Diluted Earnings Per Share:
As reported ............................................. $ 0.21 $ 0.19 $ 0.76 $ 0.42
Pro forma ............................................... $ 0.20 $ 0.19 $ 0.74 $ 0.42
6
(b) Employee Benefit Plans.
The Company's net periodic cost includes the following components relating
to pension and postretirement benefits:
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------
2003 2004
--------------------------- ----------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- --------------
(IN MILLIONS)
Service cost ........................... $ 9 $ 1 $ 10 $ 1
Interest cost .......................... 25 8 25 8
Expected return on plan assets ......... (23) (3) (26) (3)
Net amortization ....................... 11 4 10 3
Other .................................. -- -- 3 --
---- ---- ---- ----
Net periodic cost ...................... $ 22 $ 10 $ 22 $ 9
==== ==== ==== ====
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------
2003 2004
--------------------------- ----------------------------
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------------- -------- --------------
(IN MILLIONS)
Service cost ........................... $ 18 $ 2 $ 20 $ 2
Interest cost .......................... 51 16 51 16
Expected return on plan assets ......... (46) (6) (52) (6)
Net amortization ....................... 22 7 19 6
Other .................................. -- -- 3 2
---- ---- ---- ----
Net periodic cost ...................... $ 45 $ 19 $ 41 $ 20
==== ==== ==== ====
The Company expects to contribute $26 million to its postretirement
benefits plan in 2004. As of June 30, 2004, $13 million of contributions have
been made. Contributions to the pension plan are not required in 2004; however,
the Company may elect to make a voluntary contribution in 2004.
In addition to the Company's non-contributory pension plan, the Company
maintains a non-qualified benefit restoration plan. The net periodic cost
associated with this plan for both the three months ended June 30, 2003 and 2004
was $2 million. The net periodic cost associated with this plan for the six
months ended June 30, 2003 and 2004 was $4 million and $3 million, respectively.
(3) DISCONTINUED OPERATIONS
Latin America. In February 2003, the Company sold its interest in Argener,
a cogeneration facility in Argentina, for $23 million. The carrying value of
this investment was approximately $11 million as of December 31, 2002. The
Company recorded an after-tax gain of $7 million from the sale of Argener in the
first quarter of 2003. In April 2003, the Company sold its final remaining
investment in Argentina, a 90 percent interest in Empresa Distribuidora de
Electricidad de Santiago del Estero S.A. The Company recorded an after-tax loss
of $3 million in the second quarter of 2003 related to its Latin America
operations. The Interim Financial Statements present these Latin America
operations as discontinued operations in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144).
Accordingly, the Interim Financial Statements include the necessary
reclassifications to reflect these operations as discontinued operations for the
three and six months ended June 30, 2003.
Revenues related to the Company's Latin America operations included in
discontinued operations for the three and six months ended June 30, 2003 were
$-0- and $2 million, respectively. Income from these discontinued operations for
both the three and six months ended June 30, 2003 is reported net of income tax
expense of $2 million.
CenterPoint Energy Management Services, Inc. In November 2003, the Company
completed the sale of a component of its Other Operations business segment,
CenterPoint Energy Management Services, Inc. (CEMS), that provides district
cooling services in the Houston central business district and related
complementary energy services
7
to district cooling customers and others. The Company recorded an after-tax loss
in discontinued operations of $16 million ($25 million pre-tax) during the
second quarter of 2003 to record the impairment of the long-lived asset based on
the impending sale and to record one-time employee termination benefits. The
Interim Financial Statements present these CEMS operations as discontinued
operations in accordance with SFAS No. 144. Accordingly, the Interim Financial
Statements include the necessary reclassifications to reflect these operations
as discontinued operations for the three and six months ended June 30, 2003.
Revenues related to CEMS included in discontinued operations for the three
and six months ended June 30, 2003, were $3 million and $5 million,
respectively. The loss from these discontinued operations for the three and six
months ended June 30, 2003 is reported net of income tax benefit of $1 million
and $2 million, respectively.
(4) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (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. On December 24, 2003, the
FASB issued a revision to FIN 46 (FIN 46-R). For special-purpose entities
(SPE's) created before February 1, 2003, the Company applied the provisions of
FIN 46 or FIN 46-R as of December 31, 2003. The revised FIN 46-R is effective
for all other entities for financial periods ending after March 15, 2004. As
discussed in Note 10(b), the Company has subsidiary trusts that have Mandatorily
Redeemable Preferred Securities outstanding. The trusts were determined to be
variable interest entities under FIN 46-R and the Company also determined that
it is not the primary beneficiary of the trusts. As of December 31, 2003, the
Company deconsolidated the trusts and instead reports its junior subordinated
debentures due to the trusts as long-term debt. The Company also evaluated two
purchase power contracts with qualifying facilities as defined in the Public
Utility Regulatory Policies Act of 1978 related to its Electric Generation
business segment. The Company concluded it was not required to consolidate the
entities that own the qualifying facilities.
On December 23, 2003, the FASB issued SFAS No. 132 (Revised 2003),
"Employer's Disclosures about Pensions and Other Postretirement Benefits" (SFAS
No. 132(R)) which increases the existing disclosure requirements by requiring
more details about pension plan assets, benefit obligations, cash flows, benefit
costs and related information. Companies are required to segregate plan assets
by category, such as debt, equity and real estate, and to provide certain
expected rates of return and other informational disclosures. SFAS No. 132(R)
also requires companies to disclose various elements of pension and
postretirement benefit costs in interim-period financial statements for quarters
beginning after December 15, 2003. The Company has adopted the disclosure
requirements of SFAS No. 132(R) in Note 2 to these Interim Financial Statements.
On May 19, 2004, the FASB issued a FASB Staff Position (FSP) addressing
the appropriate accounting and disclosure requirements for companies that
sponsor a postretirement health care plan that provides prescription drug
benefits. The new guidance from the FASB was deemed necessary as a result of the
2003 Medicare prescription law, which includes a federal subsidy for qualifying
companies. FSP FAS 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS
106-2)," requires that the effects of the federal subsidy be considered an
actuarial gain and treated like similar gains and losses and requires certain
disclosures for employers that sponsor postretirement heath care plans that
provide prescription drug benefits. The FASB's related existing guidance, FSP
FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," will be
superseded upon the effective date of FAS 106-2. The effective date of the new
FSP is the first interim or annual period beginning after June 15, 2004, except
for certain nonpublic entities which have until fiscal years beginning after
December 15, 2004. The Company does not expect the adoption of FAS 106-2 to have
a material effect on its results of operations or financial condition.
In its June 30, 2004 meeting, the Emerging Issues Task Force (EITF)
reached a tentative conclusion on EITF Issue No. 04-8 "Accounting Issues Related
to Certain Features of Contingently Convertible Debt and the Effect on Diluted
Earnings Per Share" (EITF 04-8) that would require companies that have issued
certain contingently convertible debt instruments with a market price trigger to
be treated the same as traditional convertible debt instruments for earnings per
share (EPS) purposes. The contingently convertible debt instruments would be
taken
8
into consideration in the calculation of diluted EPS using the "if-converted"
method. The FASB staff is seeking comments from constituents on the
appropriateness of this tentative conclusion and whether SFAS No. 128, "Earnings
Per Share", requires a technical amendment to support the tentative conclusion.
The EITF plans to discuss this issue again at its next meeting, which is
scheduled in September 2004. The Company issued contingently convertible debt
instruments in 2003. If a consensus is ultimately reached on EITF 04-8 as
currently proposed, the Company's diluted EPS would be lower.
(5) REGULATORY MATTERS
(a) 2004 True-Up Proceeding.
On March 31, 2004, CenterPoint Houston, Texas Genco, LP and Reliant Energy
Retail Services LLC, a former affiliate and current subsidiary of Reliant
Energy, Inc. (formerly named Reliant Resources, Inc.) (RRI), filed the final
true-up application required by the Texas electric restructuring law with the
Public Utility Commission of Texas (Texas Utility Commission). The Texas
electric restructuring law authorizes public utilities to recover in 2004 a
true-up balance composed of stranded power plant costs, the cost of
environmental controls and certain other costs associated with transition from a
regulated to a competitive environment (2004 True-Up Proceeding). CenterPoint
Houston's requested true-up balance is $3.7 billion, excluding interest.
CenterPoint Houston has provided testimony and documentation to support the $3.7
billion it seeks to recover in the 2004 True-Up Proceeding. Third parties have
challenged the amounts CenterPoint Houston has requested to recover, and
recommended partial or total disallowance of such amounts. The staff of the
Texas Utility Commission has recommended the disallowance of $1.8 billion and
all interest. To the extent recovery of any portion of the true-up balance is
denied or if CenterPoint Houston agrees to forego recovery of a portion of the
request under a settlement agreement, CenterPoint Houston would be unable to
recover those amounts in the future.
The Texas Utility Commission conducted hearings from June 21, 2004 through
July 7, 2004. The true-up proceeding will result in either additional charges
being assessed or credits being issued through the utility's non-bypassable
delivery charges. Non-bypassable delivery charges are those that must be paid by
essentially all customers and cannot, except in limited circumstances, be
avoided by switching to self-generation. The law also authorizes the Texas
Utility Commission to permit utilities to issue transition bonds based on the
securitization of revenues associated with the transition charges.
Following adoption of the true-up rule by the Texas Utility Commission in
2001, CenterPoint Houston appealed the provisions of the rule that permitted
interest to be recovered on stranded costs only from the date of the Texas
Utility Commission's final order in the 2004 True-Up Proceeding, instead of from
January 1, 2002 as CenterPoint Houston contends is required by law. On June 18,
2004, the Texas Supreme Court ruled that interest on stranded costs began to
accrue as of January 1, 2002 and remanded the rule to the Texas Utility
Commission to review the interaction between the Supreme Court's interest
decision and the Texas Utility Commission's capacity auction true-up rule and
the extent to which the capacity auction true-up results in the recovery of
interest. The Texas Utility Commission has established a procedural schedule for
a hearing to be held on this issue on September 8, 2004. The Company has not
accrued interest income on stranded costs in its consolidated financial
statements.
The Texas electric restructuring law requires a final order to be issued
by the Texas Utility Commission not more than 150 days after a proper filing is
made by the regulated utility, although under its rules the Texas Utility
Commission can extend the 150-day deadline for good cause. The Company expects a
decision from the Texas Utility Commission addressing issues other than interest
in late August 2004, and a decision addressing the interest issue after the
hearing scheduled for September 8, 2004. The Company and/or third parties may
appeal such decisions to a state court. Any such appeal may delay resolution and
any recovery of disputed amounts.
As of June 30, 2004, CenterPoint Houston has recorded net regulatory
assets totaling $3.4 billion. If events were to occur during the 2004 True-Up
Proceeding that made the recovery of these regulatory assets no longer probable,
the Company would write off the unrecoverable balance of such assets as a charge
against earnings.
9
(b) Generation Asset Impairment Contingency.
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 144. As of June 30, 2004, no impairment of its Texas
generation assets had been indicated. The sale of the Company's 81% ownership
interest in Texas Genco will result in an after-tax loss of approximately
$250 million in the third quarter of 2004.
(c) Final Fuel Reconciliation.
On March 4, 2004, an Administrative Law Judge (ALJ) issued a Proposal for
Decision (PFD) relating to CenterPoint Houston's final fuel reconciliation.
CenterPoint Houston reserved $117 million, including $30 million of interest, in
the fourth quarter of 2003 reflecting the ALJ's recommendation. On April 15,
2004, the Texas Utility Commission affirmed the PFD's finding in part, reversed
in part, and remanded one issue back to the ALJ. On May 28, 2004, the Texas
Utility Commission approved a settlement of the remanded issue and issued a
final order which reduced the disallowance. As a result of the final order, the
Company reversed $23 million, including $8 million of interest, of the $117
million reserve recorded in the fourth quarter of 2003. The results of the Texas
Utility Commission's final decision will be a component of the 2004 True-Up
Proceeding. The Company has appealed certain portions of the Texas Utility
Commission's final order involving a disallowance of approximately $67
million.
(d) Rate Cases.
The City of Houston and the 28 other incorporated cities in CenterPoint
Energy Entex's (Entex) Houston Division have approved a rate settlement with
Entex. The Railroad Commission of Texas (Texas Railroad Commission), which has
original jurisdiction over Entex's rates in the unincorporated areas of the
Houston Division (the environs), approved the settlement in general but required
that approximately $8 million in franchise fees, which had been allocated to the
environs customers, apply only to sales within the 28 incorporated cities.
Entex, which has historically allocated franchise fees across all customers
within its Houston Division, has appealed this revision to the settlement
agreement. Entex is taking action to expedite the changes that are necessary at
the city level to conform the recovery of franchise fees with the Texas Railroad
Commission's ruling. Assuming full recovery of the franchise fees that are the
subject of this appeal, the annualized effect of this multi-jurisdictional rate
increase will be approximately $14 million.
On July 2, 2004, CenterPoint Energy Arkla (Arkla) filed an application for
a general rate increase of $7 million with the Oklahoma Corporation Commission
(OCC). The OCC staff has begun its review of the request and a decision is
anticipated before the end of 2004.
On July 14, 2004, CenterPoint Energy Minnegasco filed an application for a
general rate increase of $22 million with the Minnesota Public Utility
Commission (MPUC). A final decision on this rate relief request is expected from
the MPUC in May 2005. Interim rates of $17 million on an annualized basis are
expected to become effective on October 1, 2004, subject to refund.
On July 15, 2004, Arkla filed with the Arkansas Public Service Commission
a notice that it intends to file for an application for a general rate increase
by mid-October 2004. Arkla has not yet determined the amount of the rate
increase to be requested.
On July 21, 2004, the Louisiana Public Service Commission approved a
settlement which will increase base rate and service charge revenues for Arkla
by approximately $7 million annually.
(e) City of Tyler, Texas Dispute.
In July 2002, the City of Tyler, Texas, asserted that Entex had
overcharged residential and small commercial customers in that city for
excessive gas costs under supply agreements in effect since 1992. That dispute
has been referred to the Texas Railroad Commission by agreement of the parties
for a determination of whether Entex has
10
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. In July 2004, Entex
filed a lawsuit in a Travis County district court challenging a ruling by the
Texas Railroad Commission in this proceeding that "to the extent raised by the
City of Tyler, issues related to a consideration of the reasonableness of
Entex's gas costs and purchase practices will be considered in this proceeding."
In its lawsuit, Entex contends that the Texas Railroad Commission ruling expands
the scope of review of the recovery of historical gas purchases beyond what is
permitted by law and beyond what the parties requested in the joint petition
that initiated the proceeding at the Texas Railroad Commission. 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.
(6) DERIVATIVE FINANCIAL 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 to mitigate the impact of changes in cash flows of its natural gas
businesses on its operating results and cash flows.
Cash Flow Hedges. During the six months ended June 30, 2004, no hedge
ineffectiveness was recognized in earnings from derivatives that qualify for and
are designated as cash flow hedges. No component of the derivative instruments'
gain or loss was excluded from the assessment of effectiveness. As of June 30,
2004, the Company expects $57 million in accumulated other comprehensive income
to be reclassified into net income during the next twelve months.
Interest Rate Swaps. As of December 31, 2003, the Company had an
outstanding interest rate swap with a notional amount of $250 million to fix the
interest rate applicable to floating rate short-term debt. This swap, which
expired in January 2004, did not qualify as a cash flow hedge under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), and was marked to market in the Company's Consolidated Balance Sheets with
changes in market value reflected in interest expense in the Statements of
Consolidated Income.
During 2002, the Company settled forward-starting interest rate swaps
having an aggregate notional amount of $1.5 billion at a cost of $156 million,
which was recorded in other comprehensive income and is being amortized into
interest expense over the life of the designated fixed-rate debt. Amortization
of amounts deferred in accumulated other comprehensive income for the six months
ended June 30, 2004 was $13 million. As of June 30, 2004, the Company expects
$28 million in accumulated other comprehensive income to be reclassified into
net income during the next twelve months.
Embedded Derivative. The Company's $575 million of convertible senior
notes, issued May 19, 2003 and $255 million of convertible senior notes, issued
December 17, 2003, contain contingent interest provisions. The contingent
interest component is an embedded derivative as defined by SFAS No. 133, and
accordingly, must be split from the host instrument and recorded at fair value
on the balance sheet. The value of the contingent interest components was not
material at issuance or at June 30, 2004.
(7) GOODWILL AND INTANGIBLES
Goodwill as of December 31, 2003 and June 30, 2004 by reportable business
segment is as follows (in millions):
Natural Gas Distribution .......................... $1,085
Pipelines and Gathering ........................... 601
Other Operations .................................. 55
------
Total ........................................... $1,741
======
The Company completed its annual evaluation of goodwill for impairment as
of January 1, 2004 and no impairment was indicated.
11
The components of the Company's other intangible assets consist of the
following:
DECEMBER 31, 2003 JUNE 30, 2004
--------------------------- ---------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ------------ ----------- ------------
(IN MILLIONS)
Land use rights.................................... $ 61 $ (14) $ 61 $ (14)
Other.............................................. 38 (5) 39 (7)
----------- ---------- ----------- ----------
Total.......................................... $ 99 $ (19) $ 100 $ (21)
=========== ========== =========== ==========
The Company recognizes specifically identifiable intangibles, including
land use rights and permits, when specific rights and contracts are acquired.
The Company has no intangible assets with indefinite lives recorded as of June
30, 2004. The Company amortizes other acquired intangibles on a straight-line
basis over the lesser of their contractual or estimated useful lives that range
from 40 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 June
30, 2003 and 2004 was $0.6 million and $0.8 million, respectively. Amortization
expense for other intangibles for the six months ended June 30, 2003 and 2004
was $1.1 million and $1.7 million, respectively. Estimated amortization expense
for the remainder of 2004 and the five succeeding fiscal years is as follows (in
millions):
2004............................. $ 2
2005............................. 4
2006............................. 3
2007............................. 2
2008............................. 2
2009............................. 2
-------
Total.......................... $ 15
=======
(8) COMPREHENSIVE INCOME
The following table summarizes the components of total comprehensive
income:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
(IN MILLIONS)
Net income........................................... $ 63 $ 58 $ 232 $ 131
Other comprehensive income:
Net deferred gain from cash flow hedges............ 9 8 7 16
Reclassification of deferred loss (gain) from cash
flow hedges realized in net income............... 2 (1) 3 1
Other comprehensive income from discontinued
operations....................................... -- -- 1 --
----------- ----------- ----------- -----------
Other comprehensive income........................... 11 7 11 17
----------- ----------- ----------- -----------
Comprehensive income ................................ $ 74 $ 65 $ 243 $ 148
=========== =========== =========== ===========
(9) CAPITAL STOCK
CenterPoint Energy has 1,020,000,000 authorized shares of capital stock,
comprised of 1,000,000,000 shares of $0.01 par value common stock and 20,000,000
shares of $0.01 par value preferred stock. At December 31, 2003, 306,297,147
shares of CenterPoint Energy common stock were issued and 305,385,434 shares of
CenterPoint Energy common stock were outstanding. At June 30, 2004, 307,434,725
shares of CenterPoint Energy common stock were issued and 307,434,559 shares of
CenterPoint Energy common stock were outstanding. Outstanding common shares
exclude (a) shares pledged to secure a loan to CenterPoint Energy's Employee
Stock Ownership Plan (911,547 and -0- at December 31, 2003 and June 30, 2004,
respectively) and (b) treasury shares (166 at both December 31, 2003 and June
30, 2004). CenterPoint Energy declared a dividend of $0.10 per share in the
first quarter of 2003 and $0.20 per share in the second quarter of 2003, which
included the third quarter dividend
12
declared on June 18, 2003 and paid on September 10, 2003. CenterPoint Energy
declared a dividend of $0.10 per share in each of the first and second quarters
of 2004.
The Company's sale of its interest in Texas Genco described in Note 15
will result in an after-tax loss of approximately $250 million in the third
quarter of 2004. In addition, the 2004 True-Up Proceeding could also result in
charges against the Company's earnings. The loss related to Texas Genco will
reduce the Company's earnings below the level required for the Company to
continue paying its current quarterly dividends out of current earnings as
required under the Company's SEC financing order. However, in May 2004, the
Company received an order from the SEC under the 1935 Act authorizing it to
continue to pay its current quarterly dividend in the second and third quarters
of 2004 out of capital or unearned surplus in the event the Company takes such a
charge against earnings. If the Company's earnings for the fourth quarter of
2004 or subsequent quarters are insufficient to pay dividends from current
earnings due to these or other factors, additional authority would be required
from the SEC for payment of the quarterly dividend from capital or unearned
surplus, but there can be no assurance that the SEC would authorize such
payments.
(10) SHORT-TERM BORROWINGS, LONG-TERM DEBT AND RECEIVABLES FACILITY
(a) Short-term Borrowings.
As of June 30, 2004, Texas Genco had a revolving credit facility that
provided for an aggregate of $75 million of committed credit. The revolving
credit facility terminates on December 21, 2004. As of June 30, 2004, there were
no borrowings outstanding under the revolving credit facility.
(b) Long-term Debt.
As of June 30, 2004, CERC Corp. had a revolving credit facility that
provided for an aggregate of $250 million in committed credit. The revolving
credit facility terminates on March 23, 2007. Fully-drawn rates for borrowings
under this facility, including the facility fee, are the London interbank
offered rate (LIBOR) plus 150 basis points based on current credit ratings and
the applicable pricing grid. As of June 30, 2004, such credit facility was not
utilized.
In February 2004, $56 million aggregate principal amount of collateralized
5.6% pollution control bonds due 2027 and $44 million aggregate principal amount
of 4.25% collateralized insurance-backed pollution control bonds due 2017 were
issued on behalf of CenterPoint Houston. The pollution control bonds are
collateralized by general mortgage bonds of CenterPoint Houston with principal
amounts, interest rates and maturities that match the pollution control bonds.
The proceeds were used to extinguish two series of 6.7% collateralized pollution
control bonds with an aggregate principal amount of $100 million issued on
behalf of CenterPoint Energy. CenterPoint Houston's 6.7% first mortgage bonds
which collateralized CenterPoint Energy's payment obligations under the refunded
pollution control bonds were retired in connection with the extinguishment of
the refunded pollution control bonds. CenterPoint Houston's 6.7% notes payable
to CenterPoint Energy were also cancelled upon the extinguishment of the
refunded pollution control bonds.
In March 2004, $45 million aggregate principal amount of 3.625%
collateralized insurance-backed pollution control bonds due 2012 and $84 million
aggregate principal amount of 4.25% collateralized insurance-backed pollution
control bonds due 2017 were issued on behalf of CenterPoint Houston. The
pollution control bonds are collateralized by general mortgage bonds of
CenterPoint Houston with principal amounts, interest rates and maturities that
match the pollution control bonds. The proceeds were used to extinguish two
series of 6.375% collateralized pollution control bonds with an aggregate
principal amount of $45 million and one series of 5.6% collateralized pollution
control bonds with an aggregate principal amount of $84 million issued on behalf
of CenterPoint Energy. CenterPoint Houston's 6.375% and 5.6% first mortgage
bonds which collateralized CenterPoint Energy's payment obligations under the
refunded pollution control bonds were retired in connection with the
extinguishment of the refunded pollution control bonds. CenterPoint Houston's
6.375% and 5.6% notes payable to CenterPoint Energy were also cancelled upon the
extinguishment of the refunded pollution control bonds.
Junior Subordinated Debentures (Trust Preferred Securities). In February
1997, two Delaware statutory business trusts created by CenterPoint Energy (HL&P
Capital Trust I and HL&P Capital Trust II) issued to the
13
public (a) $250 million aggregate amount of preferred securities and (b) $100
million aggregate amount of capital securities, respectively. In February 1999,
a Delaware statutory business trust created by CenterPoint Energy (REI Trust I)
issued $375 million aggregate amount of preferred securities to the public. Each
of the trusts used the proceeds of the offerings to purchase junior subordinated
debentures issued by CenterPoint Energy having interest rates and maturity dates
that correspond to the distribution rates and the mandatory redemption dates for
each series of preferred securities or capital securities. As discussed in Note
4, upon the Company's adoption of FIN 46, the junior subordinated debentures
discussed above were included in long-term debt as of December 31, 2003 and June
30, 2004.
The junior subordinated debentures are the trusts' sole assets and their
entire operations. CenterPoint Energy considers its obligations under the
Amended and Restated Declaration of Trust, Indenture, Guaranty Agreement and,
where applicable, Agreement as to Expenses and Liabilities, relating to each
series of preferred securities or capital securities, taken together, to
constitute a full and unconditional guarantee by CenterPoint Energy of each
trust's obligations related to the respective series of preferred securities or
capital securities.
The preferred securities and capital securities are mandatorily redeemable
upon the repayment of the related series of junior subordinated debentures at
their stated maturity or earlier redemption. Subject to some limitations,
CenterPoint Energy has the option of deferring payments of interest on the
junior subordinated debentures. During any deferral or event of default,
CenterPoint Energy may not pay dividends on its capital stock. As of June 30,
2004, no interest payments on the junior subordinated debentures had been
deferred.
The outstanding aggregate liquidation amount, distribution rate and
mandatory redemption date of each series of the preferred securities or capital
securities of the trusts described above and the identity and similar terms of
each related series of junior subordinated debentures are as follows:
AGGREGATE LIQUIDATION
AMOUNTS AS OF
------------------------
DISTRIBUTION MANDATORY
RATE/ REDEMPTION
DECEMBER 31, JUNE 30, INTEREST DATE/
TRUST 2003 2004 RATE MATURITY DATE JUNIOR SUBORDINATED DEBENTURES
----- ---- ---- ---- ------------- ------------------------------
(IN MILLIONS)
REI Trust I................. $ 375 $ 375 7.20% March 2048 7.20% Junior Subordinated
Debentures
HL&P Capital Trust I(1)..... $ 250 $ -- 8.125% March 2046 8.125% Junior Subordinated
Deferrable Interest Debentures
Series A
HL&P Capital Trust II....... $ 100 $ 100 8.257% February 2037 8.257% Junior Subordinated
Deferrable Interest Debentures
Series B
- ----------
(1) The preferred securities issued by HL&P Capital Trust I having an
aggregate liquidation amount of $250 million were redeemed at 100% of
their aggregate liquidation amount in January 2004.
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 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. As discussed in Note 4, upon the
Company's adoption of FIN 46, the junior subordinated debentures discussed above
were included in long-term debt as of December 31, 2003 and June 30, 2004.
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, 2003 and June 30, 2004, $0.4 million
14
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. 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
June 30, 2004, no interest payments on the convertible junior subordinated
debentures had been deferred.
(c) Receivables Facility.
On January 21, 2004, CERC replaced its $100 million receivables facility
with a $250 million receivables facility. The $250 million receivables facility
terminates on January 19, 2005. As of June 30, 2004, CERC had $173 million
outstanding under its receivables facility.
(11) COMMITMENTS AND CONTINGENCIES
(a) Legal Matters.
RRI Indemnified Litigation
The Company, CenterPoint Houston or their predecessor, Reliant Energy, and
certain of their former subsidiaries are named as defendants in several lawsuits
described below. Under a master separation agreement between Reliant Energy and
RRI, the Company and its subsidiaries are entitled to be indemnified by RRI for
any losses, including attorneys' fees and other costs, arising out of the
lawsuits described below under Electricity and Gas Market Manipulation Cases and
Other Class Action Lawsuits. Pursuant to the indemnification obligation, RRI is
defending the Company and its subsidiaries to the extent named in these
lawsuits. The ultimate outcome of these matters cannot be predicted at this
time.
Electricity and Gas Market Manipulation Cases. A large number of lawsuits
have been filed against numerous market participants and remain pending in both
federal and state courts in California and Nevada in connection with the
operation of the electricity and natural gas markets in California and certain
other western states in 2000-2001, a time of power shortages and significant
increases in prices. These lawsuits, many of which have been filed as class
actions, are based on a number of legal theories, including violation of state
and federal antitrust laws, laws against unfair and unlawful business practices,
the federal Racketeer Influenced Corrupt Organization Act, false claims statutes
and similar theories and breaches of contracts to supply power to governmental
entities. Plaintiffs in these lawsuits, which include state officials and
governmental entities as well as private litigants, are seeking a variety of
forms of relief, including recovery of compensatory damages (in some cases in
excess of $1 billion), a trebling of compensatory damages and punitive damages,
injunctive relief, restitution, interest due, disgorgement, civil penalties and
fines, costs of suit, attorneys' fees and divestiture of assets. To date, some
of these complaints have been dismissed by the trial court and are on appeal,
but most of the lawsuits remain in early procedural stages. Our former
subsidiary, RRI, was a participant in the California markets, owning generating
plants in the state and participating in both electricity and natural gas
trading in that state and in western power markets generally. RRI, some of its
subsidiaries and in some cases, corporate officers of some of those companies,
have been named as defendants in these suits.
The Company, CenterPoint Houston or their predecessor, Reliant Energy,
were named in approximately 25 of these lawsuits, which were instituted between
2001 and 2004 and are pending in state courts in Los Angeles County and San
Diego County, in federal district courts in San Francisco, San Diego, Los
Angeles and Nevada and before the Ninth Circuit Court of Appeals. However,
neither the Company nor Reliant Energy was a participant in the electricity or
natural gas markets in California. The Company and Reliant Energy have been
dismissed from certain of the lawsuits, either voluntarily by the plaintiffs or
by order of the court and the Company believes it is not a proper defendant in
the remaining cases and will continue to seek dismissal from such remaining
cases. On July 6, 2004, the Ninth Circuit affirmed the Company's removal to
federal court of an electric case brought by the California Attorney General and
affirmed the court's dismissal of that case based upon the filed rate doctrine
and federal preemption.
Other Class Action Lawsuits. Fifteen class action lawsuits filed in May,
June and July 2002 on behalf of purchasers of securities of RRI and/or Reliant
Energy have been consolidated in federal district court in Houston.
15
RRI and certain of its former and current executive officers are named as
defendants. The consolidated complaint also names RRI, Reliant Energy, the
underwriters of the initial public offering of RRI common stock in May 2001 (RRI
Offering), and RRI's and Reliant Energy's independent auditors as defendants.
The consolidated amended complaint seeks monetary relief purportedly on behalf
of purchasers of common stock of Reliant Energy or RRI during certain time
periods ranging from February 2000 to May 2002, and purchasers of common stock
that can be traced to the RRI Offering. The plaintiffs allege, among other
things, that the defendants misrepresented their revenues and trading volumes by
engaging in round-trip trades and improperly accounted for certain structured
transactions as cash-flow hedges, which resulted in earnings from these
transactions being accounted for as future earnings rather than being accounted
for as earnings in fiscal year 2001. In January 2004 the trial judge dismissed
the plaintiffs' allegations that the defendants had engaged in fraud, but claims
based on alleged misrepresentations in the registration statement issued in the
RRI Offering remain. In June 2004, the plaintiffs filed a motion for class
certification, which the defendants have asked the court to deny.
In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former and
current officers of RRI for alleged violations of federal securities laws. The
plaintiffs in this lawsuit allege that the defendants violated federal
securities laws by issuing false and misleading statements to the public, and
that the defendants made false and misleading statements as part of an alleged
scheme to artificially inflate trading volumes and revenues. In addition, the
plaintiffs assert claims of fraudulent and negligent misrepresentation and
violations of Illinois consumer law. In January 2004 the trial judge ordered
dismissal of plaintiffs' claims on the ground that they did not set forth a
claim. The plaintiffs filed an amended complaint in March 2004, which the
defendants are asking the court to dismiss.
In May 2002, three class action lawsuits were filed in federal district
court in Houston on behalf of participants in various employee benefits plans
sponsored by Reliant Energy. Two of the lawsuits have been dismissed without
prejudice. Reliant Energy and certain current and former members of its benefits
committee are the remaining defendants in the third lawsuit. That lawsuit
alleges that the defendants breached their fiduciary duties to various employee
benefits plans, directly or indirectly sponsored by Reliant Energy, in violation
of the Employee Retirement Income Security Act of 1974. The plaintiffs allege
that the defendants permitted the plans to purchase or hold securities issued by
Reliant Energy when it was imprudent to do so, including after the prices for
such securities became artificially inflated because of alleged securities fraud
engaged in by the defendants. The complaint seeks monetary damages for losses
suffered on behalf of the plans and a putative class of plan participants whose
accounts held Reliant Energy or RRI securities, as well as equitable relief in
the form of restitution. In July 2004, another class action suit was filed in
federal court on behalf of the Reliant Energy Savings Plan and a class
consisting of participants in that plan against Reliant Energy and the Reliant
Energy Benefits Committee. The allegations and the relief sought in the new suit
are substantially similar to those in the previously pending suit; however, the
new suit also alleges that Reliant Energy and its Benefits Committee breached
their fiduciary duties to the Savings Plan and its participants by investing
plan funds in Reliant Energy stock when Reliant Energy or its subsidiaries were
allegedly manipulating the California energy market.
In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of the Company. The
complaint sets forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleges that the defendants caused the Company to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off of RRI and the RRI
Offering. The complaint seeks monetary damages on behalf of the Company as well
as equitable relief in the form of a constructive trust on the compensation paid
to the defendants. In March 2003, the court dismissed this case on the grounds
that the plaintiff did not make an adequate demand on the Company before filing
suit. Thereafter, the plaintiff sent another demand asserting the same claims.
The Company's board of directors investigated that demand and similar
allegations made in a June 28, 2002 demand letter sent on behalf of a Company
shareholder. The latter letter demanded that the Company take several actions in
response to alleged round-trip trades occurring in 1999, 2000, and 2001. In June
2003, the Board determined that these proposed actions would not be in the best
interests of the Company.
The Company believes that none of the lawsuits described under "Other
Class Action Lawsuits" has merit because, among other reasons, the alleged
misstatements and omissions were not material and did not result in any damages
to the plaintiffs.
16
Other Legal Matters
Texas Antitrust Action. In July 2003, Texas Commercial Energy filed in
federal court in Corpus Christi, Texas a lawsuit against Reliant Energy, RRI,
Reliant Electric Solutions, LLC, several other RRI subsidiaries and a number of
other participants in the Electric Reliability Council of Texas (ERCOT) power
market. The plaintiff, a retail electricity provider in the Texas market served
by ERCOT, alleged that the defendants conspired to illegally fix and
artificially increase the price of electricity in violation of state and federal
antitrust laws and committed fraud and negligent misrepresentation. The lawsuit
sought damages in excess of $500 million, exemplary damages, treble damages,
interest, costs of suit and attorneys' fees. In February 2004, this complaint
was amended to add the Company and CenterPoint Houston, as successors to Reliant
Energy, and Texas Genco, LP as defendants. The plaintiff's principal allegations
had previously been investigated by the Texas Utility Commission and found to be
without merit. In June 2004, the federal court dismissed the plaintiff's claims
and in July 2004, the plaintiff filed a notice of appeal. The Company intends to
contest the appeal. The ultimate outcome of this matter cannot be predicted at
this time.
Municipal Franchise Fee Lawsuits. In February 1996, the cities of Wharton,
Galveston and Pasadena (Three Cities) filed suit, for themselves and a proposed
class of all similarly situated cities in Reliant Energy's electric service
area, against Reliant Energy and Houston Industries Finance, Inc. (formerly a
wholly owned subsidiary of the Company's predecessor, Reliant Energy) alleging
underpayment of municipal franchise fees. The plaintiffs claimed that they were
entitled to 4% of all receipts of any kind for business conducted within these
cities over the previous four decades. After a jury trial involving the Three
Cities claims (but not the class of cities), the trial court decertified the
class and entered a judgment for $1.7 million, including interest, plus an award
of $13.7 million in legal fees. Despite other jury findings for the plaintiffs,
the trial court's judgment was based on the jury's finding in favor of Reliant
Energy on the affirmative defense of laches, a defense similar to a statute of
limitations defense, due to the original claimant cities having unreasonably
delayed bringing their claims during the 43 years since the alleged wrongs
began. Following this ruling, 45 cities filed individual suits against Reliant
Energy in the District Court of Harris County.
On February 27, 2003, a state court of appeals in Houston rendered an
opinion reversing the judgment against the Company and rendering judgment that
the Three Cities take nothing by their claims. The court of appeals found that
the jury's finding of laches barred all of the Three Cities' claims and that the
Three Cities were not entitled to recovery of any attorneys' fees. The Three
Cities filed a petition for review at the Texas Supreme Court, which declined to
hear the case. The Three Cities filed a motion for rehearing, which was denied
by the Supreme Court in April 2004. Now that the Three Cities case has been
favorably resolved, the Company intends to seek dismissal of the claims of the
other cities.
Natural Gas Measurement Lawsuits. CERC Corp. and certain of its
subsidiaries are defendants in a suit filed in 1997 under the Federal False
Claims Act 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. and certain of its subsidiaries are defendants in
two mismeasurement lawsuits brought against approximately 245 pipeline companies
and their affiliates pending in state court in Stevens County, Kansas.
17
In one case (originally filed in May 1999 and amended four times), the
plaintiffs purport to represent a class of royalty owners who allege that the
defendants have engaged in systematic mismeasurement of the volume of natural
gas for more than 25 years. The plaintiffs amended their petition in this suit
in July 2003 in response to an order from the judge denying certification of the
plaintiffs' alleged class. In the amendment the plaintiffs dismissed their
claims against certain defendants (including two CERC subsidiaries), limited the
scope of the class of plaintiffs they purport to represent and eliminated
previously asserted claims based on mismeasurement of the Btu content of the
gas. The same plaintiffs then filed a second lawsuit, again as representatives
of a class of royalty owners, in which they assert their claims that the
defendants have engaged in systematic mismeasurement of the Btu content of
natural gas for more than 25 years. In both lawsuits, the plaintiffs seek
compensatory damages, along with statutory penalties, treble damages, interest,
costs and fees. CERC and its subsidiaries believe that there has been no
systematic mismeasurement of gas and that the suits are without merit. CERC does
not expect that their ultimate outcome would have a material impact on the
financial condition or results of operations of either the Company or CERC.
Gas Cost Recovery Litigation. In October 2002, a suit was filed in state
district court in Wharton County, Texas against the Company, CERC, Entex Gas
Marketing Company, and others alleging fraud, violations of the Texas Deceptive
Trade Practices Act, violations of the Texas Utilities 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 certain 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. In February 2004, another suit was filed against CERC
in Calcasieu Parish, Louisiana, seeking to recover alleged overcharges for gas
or gas services allegedly provided by Entex without advance approval by the
Louisiana Public Service Commission. The plaintiffs in these cases seek
injunctive and declaratory relief, restitution for the alleged overcharges,
exemplary damages or trebling of actual damages and civil penalties. In these
cases, the Company, CERC and Entex Gas Marketing Company deny that they have
overcharged any of their customers for natural gas and believe that the amounts
recovered for purchased gas have been in accordance with what is permitted by
state regulatory authorities. The Company and CERC do not anticipate that the
outcome of these matters will have a material impact on the financial condition
or results of operations of either the Company or CERC.
(b) Environmental Matters.
Clean Air Standards. The Texas electric restructuring law and regulations
adopted by the Texas Commission on Environmental Quality (TCEQ) in 2001 require
substantial reductions in emission of oxides of nitrogen (NOx) from electric
generating units. The Company is currently installing cost-effective controls at
its generating plants to comply with these requirements. Through June 30, 2004,
the Company has invested $686 million for NOx emission control, and plans to
make additional expenditures of up to approximately $109 million during the
remainder of 2004 through 2007. Further revisions to these NOx requirements may
result from the EPA's ongoing review of these TCEQ rules and from the TCEQ's
future rules, expected by 2007, implementing the more stringent federal
eight-hour ozone standard. The Texas electric restructuring law provides for
stranded cost recovery for expenditures incurred before May 1, 2003 to achieve
the NOx reduction requirements. Incurred costs include costs for which
contractual obligations have been made. The Texas Utility Commission has
determined that the Company's emission control plan is the most cost-effective
option for achieving compliance with applicable air quality standards for the
Company's generating facilities and the final amount for recovery will be
determined in the 2004 True-Up Proceeding. The Company is limited to a maximum
recovery of $699 million excluding allowance for funds used during construction
and capitalized interest, as previously determined by the Texas Utility
Commission.
Hydrocarbon Contamination. CERC Corp. and certain of its subsidiaries are
among the defendants in lawsuits filed beginning in August 2001 in Caddo Parish
and Bossier Parish, Louisiana. 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," which was formerly operated by a
predecessor in interest of CERC Corp. 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.
18
Beginning about 1985, the predecessors of certain CERC Corp. defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they owned or leased. 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. The Company 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 CERC's 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 June 30, 2004, CERC had accrued $19 million for remediation of certain
Minnesota sites. At June 30, 2004, the estimated range of possible remediation
costs for these sites 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 utilized an environmental expense tracker
mechanism in its rates in Minnesota to recover estimated costs in excess of
insurance recovery. CERC has collected or accrued $12 million as of June 30,
2004 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 other sites. CERC has been
named as a defendant in lawsuits under which contribution is sought for the cost
to remediate former MGP sites based on the previous ownership of such sites by
former affiliates of CERC or its divisions. The Company is investigating details
regarding these sites and the range of environmental expenditures for potential
remediation. Based on current information, the Company has not been able to
quantify a range of potential environmental expenditures for such 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. In addition, the Company has been named as a
defendant in litigation related to such sites and in recent years has been
named, along with numerous others, as a defendant in several lawsuits filed by a
large number of individuals who claim injury due to exposure to asbestos while
working at sites along the Texas Gulf Coast. Most of these claimants have been
workers who participated in construction of various industrial facilities,
including power plants, and some of the claimants have worked at locations owned
by the Company. Although most existing claims relate to facilities owned by
Texas Genco, the Company anticipates that additional claims like those received
may be asserted in the future and intends to continue vigorously contesting
claims that it does not consider to have merit. Although their ultimate outcome
cannot be predicted at this time, the Company does not believe, based on its
experience to date, that these matters, either individually or in the aggregate,
will have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
19
(c) Other Proceedings.
The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
(d) Nuclear Insurance.
Texas Genco and the other owners of the South Texas Project maintain
nuclear property and nuclear liability insurance coverage as required by law and
periodically review available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $2.75 billion in property
damage insurance coverage, which is above the legally required minimum, but is
less than the total amount of insurance currently available for such losses.
Under the Price Anderson Act, the maximum liability to the public of
owners of nuclear power plants was $10.8 billion as of June 30, 2004. Owners are
required under the Price Anderson Act to insure their liability for nuclear
incidents and protective evacuations. Texas Genco and the other owners of the
South Texas Project currently maintain the required nuclear liability insurance
and participate in the industry retrospective rating plan under which the owners
of the South Texas Project are subject to maximum retrospective assessments in
the aggregate per incident of up to $100.6 million per reactor. The owners are
jointly and severally liable at a rate not to exceed $10 million per incident
per year.
There can be no assurance that all potential losses or liabilities will be
insurable, or that the amount of insurance will be sufficient to cover them. Any
substantial losses not covered by insurance would have a material effect on the
Company's financial condition, results of operations and cash flows.
(e) Nuclear Decommissioning.
CenterPoint Houston contributed $2.9 million in 2003 to trusts established
to fund Texas Genco's share of the decommissioning costs for the South Texas
Project, and expects to contribute $2.9 million in 2004. There are various
investment restrictions imposed upon Texas Genco by the Texas Utility Commission
and the United States Nuclear Regulatory Commission (NRC) relating to Texas
Genco's nuclear decommissioning trusts. Texas Genco and CenterPoint Energy have
each appointed two members to the Nuclear Decommissioning Trust Investment
Committee which establishes the investment policy of the trusts and oversees the
investment of the trusts' assets. The securities held by the trusts for
decommissioning costs had an estimated fair value of $198 million as of June 30,
2004, of which approximately 36% were fixed-rate debt securities and the
remaining 64% were equity securities. In May 2004, an outside consultant
estimated Texas Genco's portion of decommissioning costs to be approximately
$456 million. While the funding levels currently exceed minimum NRC
requirements, no assurance can be given that the amounts held in trust will be
adequate to cover the actual decommissioning costs of the South Texas Project.
Such costs may vary because of changes in the assumed date of decommissioning
and changes in regulatory requirements, technology and costs of labor, materials
and equipment. Pursuant to the Texas electric restructuring law, costs
associated with nuclear decommissioning that have not been recovered as of
January 1, 2002, will continue to be subject to cost-of-service rate regulation
and will be included in a charge to transmission and distribution customers of
CenterPoint Houston or its successor.
20
(12) EARNINGS PER SHARE
The following table reconciles numerators and denominators of the
Company's basic and diluted earnings per share (EPS) calculations:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2003 2004 2003 2004
------------- ------------ ------------- ------------
(IN MILLIONS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
Basic EPS Calculation:
Income from continuing operations before cumulative
effect of accounting change ........................ $ 83 $ 58 $ 165 $ 131
Discontinued operations, net of tax .................. (20) -- (13) --
Cumulative effect of accounting change, net of tax .. -- -- 80 --
------------- ------------ ------------- ------------
Net income ........................................... $ 63 $ 58 $ 232 $ 131
============= ============ ============= ============
Weighted average shares outstanding .................... 304,046,000 307,250,000 302,373,000 306,631,000
============= ============ ============= ============
Basic EPS:
Income from continuing operations before cumulative
effect of accounting change ........................ $ 0.27 $ 0.19 $ 0.54 $ 0.43
Discontinued operations, net of tax .................. (0.06) -- (0.04) --
Cumulative effect of accounting change, net of tax .. -- -- 0.27 --
------------- ------------ ------------- ------------
Net income ........................................... $ 0.21 $ 0.19 $ 0.77 $ 0.43
============= ============ ============= ============
Diluted EPS Calculation:
Net income ........................................... $ 63 $ 58 $ 232 $ 131
Plus: Income impact of assumed conversions:
Interest on 6 1/4% convertible trust preferred
securities ......................................... -- -- -- --
------------- ------------ ------------- ------------
Total earnings effect assuming dilution .............. $ 63 $ 58 $ 232 $ 131
============= ============ ============= ============
Weighted average shares outstanding .................... 304,046,000 307,250,000 302,373,000 306,631,000
Plus: Incremental shares from assumed conversions (1):
Stock options ...................................... 909,000 1,301,000 627,000 1,259,000
Restricted stock ................................... 1,131,000 1,070,000 1,131,000 1,070,000
6 1/4% convertible trust preferred securities ...... 18,000 17,000 18,000 17,000
------------- ------------ ------------- ------------
Weighted average shares assuming dilution ............ 306,104,000 309,638,000 304,149,000 308,977,000
============= ============ ============= ============
Diluted EPS:
Income from continuing operations before cumulative
effect of accounting change ........................ $ 0.27 $ 0.19 $ 0.54 $ 0.42
Discontinued operations, net of tax .................. (0.06) -- (0.04) --
Cumulative effect of accounting change, net of tax .. -- -- 0.26 --
------------- ------------ ------------- ------------
Net income ........................................... $ 0.21 $ 0.19 $ 0.76 $ 0.42
============= ============ ============= ============
- ----------
(1) For the three months ended June 30, 2003 and 2004, the computation of
diluted EPS excludes 10,205,812 and 10,024,219 purchase options,
respectively, for shares of common stock that have exercise prices
(ranging from $12.13 to $32.26 per share and $11.29 to $32.26 per share
for the second quarter 2003 and 2004, respectively) greater than the per
share average market price for the period and would thus be anti-dilutive
if exercised.
For the six months ended June 30, 2003 and 2004, the computation of
diluted EPS excludes 10,244,822 and 12,037,219 purchase options,
respectively, for shares of common stock that have exercise prices
(ranging from $7.56 to $32.26 per share and $10.92 to $32.26 per share for
the first six months of 2003 and 2004, respectively) greater than the per
share average market price for the period and would thus be anti-dilutive
if exercised.
21
The Company's contingently convertible debt is not currently considered
for purposes of diluted earnings per share because the required conversion
criteria had not been met as of the end of the reporting period (but see
Note 4 with respect to a proposed change in this treatment).
(13) REPORTABLE BUSINESS SEGMENTS
The Company's determination of reportable business segments considers the
strategic operating units under which the Company manages sales, allocates
resources and assesses performance of various products and services to wholesale
or retail customers in differing regulatory environments. The Company's Latin
America operations and its energy management services business, which were
previously reported in the Other Operations business segment, are presented as
discontinued operations within these Interim Financial Statements.
The Company has identified the following reportable business segments:
Electric Transmission & Distribution, Electric Generation, Natural Gas
Distribution, Pipelines and Gathering and Other Operations.
Financial data for the Company's reportable business segments are as
follows:
FOR THE THREE MONTHS ENDED JUNE 30, 2003
----------------------------------------------
NET
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS)
-------------- ------------ -------------
(IN MILLIONS)
Electric Transmission & Distribution.......... $ 482 (1) $ -- $ 235
Electric Generation........................... 578 (2) -- 50
Natural Gas Distribution...................... 954 17 21
Pipelines and Gathering....................... 73 49 42
Other Operations.............................. 4 5 (2)
Eliminations.................................. -- (71) --
---------- ---------- ----------
Consolidated.................................. $ 2,091 $ -- $ 346
========== ========== ==========
FOR THE THREE MONTHS ENDED JUNE 30, 2004
----------------------------------------------
NET
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS)
-------------- ------------ -------------
(IN MILLIONS)
Electric Transmission & Distribution.......... $ 374 (1) $ -- $ 127
Electric Generation........................... 553 (2) -- 119
Natural Gas Distribution...................... 1,235 10 23
Pipelines and Gathering....................... 78 35 42
Other Operations.............................. 1 2 (3)
Eliminations.................................. -- (47) --
---------- ---------- ----------
Consolidated.................................. $ 2,241 $ -- $ 308
========== ========== ==========
22
AS OF
FOR THE SIX MONTHS ENDED JUNE 30, 2003 DECEMBER 31, 2003
---------------------------------------------- -----------------
NET
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS) TOTAL ASSETS
-------------- ------------ ------------- ------------
(IN MILLIONS)
Electric Transmission & Distribution......... $ 929 (3) $ -- $ 440 $ 10,326
Electric Generation.......................... 937 (4) -- 33 4,640
Natural Gas Distribution..................... 2,982 33 151 4,661
Pipelines and Gathering...................... 134 97 85 2,519
Other Operations............................. 9 9 (2) 1,347
Eliminations................................. -- (139) -- (2,116)
---------- ---------- ---------- -------------
Consolidated................................. $ 4,991 $ -- $ 707 $ 21,377
========== ========== ========== =============
AS OF
FOR THE SIX MONTHS ENDED JUNE 30, 2004 JUNE 30, 2004
---------------------------------------------- -------------
NET
REVENUES FROM INTERSEGMENT OPERATING
NON-AFFILIATES REVENUES INCOME (LOSS) TOTAL ASSETS
-------------- ------------ ------------- ------------
(IN MILLIONS)
Electric Transmission & Distribution ........ $ 703 (3) $ -- $ 212 $ 10,235
Electric Generation.......................... 992 (4) -- 210 4,779
Natural Gas Distribution..................... 3,359 17 139 4,283
Pipelines and Gathering...................... 143 73 87 2,537
Other Operations............................. 3 3 (5) 1,309
Eliminations................................. -- (93) -- (1,991)
---------- ---------- ---------- -------------
Consolidated................................. $ 5,200 $ -- $ 643 $ 21,152
========== ========== ========== =============
- ----------
(1) Sales to subsidiaries of RRI for the three months ended June 30, 2003 and
2004 represented approximately $225 million and $202 million,
respectively, of CenterPoint Houston's transmission and distribution
revenues.
(2) Sales to subsidiaries of RRI for the three months ended June 30, 2003 and
2004 represented approximately 72% and 61%, respectively, of Texas Genco's
total revenues. Sales to another major customer for the three months ended
June 30, 2003 and 2004 represented approximately 10% and 19%,
respectively, of Texas Genco's total revenues.
(3) Sales to subsidiaries of RRI for the six months ended June 30, 2003 and
2004 represented approximately $437 million and $401 million,
respectively, of CenterPoint Houston's transmission and distribution
revenues.
(4) Sales to subsidiaries of RRI for the six months ended June 30, 2003 and
2004 represented approximately 70% and 60%, respectively, of Texas Genco's
total revenues. Sales to another major customer for the six months ended
June 30, 2003 and 2004 represented approximately 10% and 19%,
respectively, of Texas Genco's total revenues.
(14) TEXAS GENCO'S PURCHASE OF ADDITIONAL INTEREST IN SOUTH TEXAS PROJECT
On May 28, 2004, Texas Genco announced that its Board of Directors had
voted to exercise its right of first refusal to purchase up to the entire 25.2
percent interest in the South Texas Project that is currently owned by American
Electric Power (AEP). In addition to AEP and Texas Genco, the 2,500 megawatt
nuclear plant is owned by two other co-owners. AEP had previously announced that
it had received an offer of $333 million, subject to certain adjustments, to
purchase its 630 megawatt interest. Under the South Texas Project Participation
Agreement, co-owners wishing to acquire AEP's interest are entitled to do so at
the proposed sale price. One co-owner did not exercise its right of first
refusal, while the other co-owner exercised its right to purchase at least 12
percent, or 300 megawatts. Accordingly, Texas Genco should be entitled to
purchase a 13.2 percent interest, or 330 megawatts, from AEP at an estimated
price of $175 million. Texas Genco expects to fund the purchase of its share of
AEP's
23
interest with internally generated funds and, if and to the extent required, a
new bank credit facility. Texas Genco expects to complete this transaction by
the first quarter of 2005.
(15) SUBSEQUENT EVENTS
On July 21, 2004, the Company and Texas Genco announced a definitive
agreement for GC Power Acquisition LLC, a newly formed entity owned in equal
parts by affiliates of The Blackstone Group, Hellman & Friedman LLC, Kohlberg
Kravis Roberts & Co. L.P. and Texas Pacific Group, to acquire Texas Genco for
approximately $3.65 billion in cash.
The transaction will be accomplished in two steps. In the first step,
expected to be completed in the fourth quarter of 2004, Texas Genco will
purchase the approximately 19% of its shares owned by the public in a cash-out
merger at a price of $47 per share. Prior to its public shareholder buy-out,
Texas Genco will file with the SEC a Rule 13e-3 transaction statement and a
Schedule 14C information statement relating to the Company's adoption of the
transaction agreement and approval of the transactions it contemplates.
Following the cash-out merger of the publicly owned shares, a subsidiary of
Texas Genco that will own Texas Genco's coal, lignite and gas-fired generation
plants will merge with a subsidiary of GC Power Acquisition. The closing of the
first step of the transaction is subject to several conditions, including the
mailing of the information statement described above, the receipt of debt
financing under the financing commitments described below, the expiration or
termination of any applicable waiting period under the antitrust laws (including
the Hart Scott Rodino Antitrust Improvement Act of 1976) and the FERC's
certification of the entity that will own Texas Genco's coal, lignite and
gas-fired generation plants as an "exempt wholesale generator" under the 1935
Act.
In the second step of the transaction, expected to take place in the first
quarter of 2005 following receipt of approval by the NRC, Texas Genco, the
principal remaining asset of which, at that time, will be Texas Genco's interest
in the South Texas Project nuclear facility, will merge with another subsidiary
of GC Power Acquisition.
Cash proceeds to the Company will be approximately $2.2 billion from the
first step of the transaction and $700 million from the second step of the
transaction, for total cash proceeds of approximately $2.9 billion, or $45.25
per share for the Company's 81% interest. The Company intends to use the net
after-tax proceeds of approximately $2.5 billion to pay down outstanding debt,
including senior debt under its bank credit facility that is secured in part by
the Company's 81% ownership interest in Texas Genco.
GC Power Acquisition has entered into a commitment letter with financing
sources, including Goldman Sachs, providing for up to $2.5 billion in the
aggregate in debt financing for the transaction and a separate overnight loan of
$717 million to Texas Genco to fund its public shareholder buy-out in the first
step of the transaction, each subject to customary closing conditions. This
overnight loan will be repaid with the proceeds of the merger of Texas Genco's
coal, lignite and gas-fired generation plants with a subsidiary of GC Power
Acquisition. In addition, GC Power Acquisition's sponsor firms have committed
upon closing of the transaction to provide up to $1.08 billion in the aggregate
in equity funding for the transaction.
The transaction has been approved by the board of directors of the Company
and by the board of directors of Texas Genco acting upon the unanimous
recommendation of a special committee composed of independent members of Texas
Genco's board. The Company has signed a written consent that satisfies all state
law voting requirements applicable to the transaction.
In connection with the transaction, Texas Genco, LP, a subsidiary of Texas
Genco, entered into a master power purchase and sale agreement with a member of
the Goldman Sachs group. Under that agreement, Texas Genco has sold forward a
substantial quantity of its available base-load capacity through 2008 and
pledged $175 million of its first mortgage bonds as collateral for its
obligations. Texas Genco's obligations under the power purchase agreement will
continue regardless of whether the transaction is completed.
As a result of this transaction, the results of Texas Genco will be
presented in discontinued operations in the third quarter of 2004 in accordance
with SFAS No. 144. The sale will result in an after-tax loss of approximately
$250 million in the third quarter of 2004. In addition, as a result of this
transaction, any future earnings of Texas Genco will be offset by an increase in
the loss.
On July 23, 2004, two plaintiffs, both Texas Genco shareholders, filed
virtually identical lawsuits in Harris County, Texas district court. The suits,
purportedly brought on behalf of holders of Texas Genco common stock, name Texas
Genco Holdings, Inc. and each of that company's directors as defendants. Both
plaintiffs allege, among other things, self-dealing and breach of fiduciary duty
by the defendants in entering into the July 2004 agreement to sell Texas Genco.
Plaintiffs seek to enjoin the transaction or, alternatively, rescind the
transaction and/or recover damages in the event that the transaction is
consummated. Texas Genco expects the cases to be consolidated. Texas Genco
believes both lawsuits to be without merit and intends to vigorously defend
against them.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CENTERPOINT ENERGY AND SUBSIDIARIES
The following discussion and analysis should be read in combination with
our Interim Financial Statements contained in Item 1 of this Form 10-Q.
EXECUTIVE SUMMARY
2ND QUARTER 2004 HIGHLIGHTS
Our operating performance and cash flow for the second quarter of 2004
compared to the second quarter of 2003 were affected by:
- the termination of revenues related to Excess Cost Over Market
(ECOM) as of January 1, 2004 compared to ECOM revenues of $101
million recorded in the second quarter of 2003;
- milder weather in 2004, negatively impacting the quarter by $16
million;
- higher net transmission costs of $5 million;
- improved operating income from Texas Genco Holdings, Inc. (Texas
Genco) of $69 million;
- continued customer growth, with the addition of over 96,000 metered
electric and gas customers;
- a decrease in interest expense of $19 million;
- a reduction of $34 million in capital expenditures; and
- a reversal of $23 million, including $8 million of interest, of the
$117 million reserve recorded in the fourth quarter of 2003 by our
Electric Transmission & Distribution business segment related to the
final fuel reconciliation.
UPDATE OF SIGNIFICANT EVENTS IN 2004
Resolution of our true-up proceeding (2004 True-Up Proceeding) and the
sale of our remaining interest in Texas Genco are the two most significant
events facing us in 2004. We expect to use the proceeds received from these two
events to repay a portion of our indebtedness. The sale of our interest in Texas
Genco will result in an after-tax loss of approximately $250 million in the
third quarter of 2004. See "Recent Events" below. The 2004 True-Up Proceeding
could also result in a charge against our earnings. The loss related to Texas
Genco will reduce our earnings below the level required for us to continue
paying our current quarterly dividends out of current earnings as required under
our Securities and Exchange Commission (SEC) financing order. However, in May
2004, we received an order from the SEC under the Public Utility Holding Company
Act of 1935 (1935 Act) authorizing us to continue to pay our current quarterly
dividend in the second and third quarters of 2004 out of capital or unearned
surplus in the event we take such a charge against earnings. If our earnings for
the fourth quarter of 2004 or subsequent quarters are insufficient to pay
dividends from current earnings due to these or other factors, additional
authority would be required from the SEC for payment of the quarterly dividend
from capital or unearned surplus, but there can be no assurance that the SEC
would authorize such payments. Any such charges would also reduce our
shareholders' equity. Any such reduction could adversely affect our ability to
achieve a ratio of common equity to total capitalization of 30% by the end of
2006, as has been represented in filings under the 1935 Act. Depending on the
magnitude of such reduction, we may need to issue equity and/or take other
action to achieve that ratio.
Our requested true-up balance is $3.7 billion, excluding interest. The
Public Utility Commission of Texas (Texas Utility Commission) conducted hearings
from June 21, 2004 through July 7, 2004 in connection with the 2004 True-Up
Proceeding. CenterPoint Energy Houston Electric, LLC (CenterPoint Houston) has
provided testimony and documentation to support the $3.7 billion it seeks to
recover in the 2004 True-Up Proceeding. Third
25
parties have challenged the amounts CenterPoint Houston has requested to
recover, and recommended partial or total disallowance of such amounts. The
staff of the Texas Utility Commission has recommended a disallowance of $1.8
billion and all interest. We expect a decision from the Texas Utility Commission
addressing issues other than interest in late August 2004, and a decision
addressing the interest issue after a hearing scheduled for September 8, 2004.
We and/or third parties may appeal such decisions to a state court. Any such
appeal may delay resolution and any recovery of disputed amounts. An ultimate
determination or a settlement at an amount less than that recorded in our
financial statements could lead to a charge that would materially adversely
affect our results of operations, financial condition and cash flows.
We intend to seek authority from the Texas Utility Commission to
securitize all or a portion of the true-up balance as early as the fourth
quarter of 2004 through the issuance of transition bonds and to be in a position
to issue those bonds by early 2005. Appeals could delay the issuance of such
bonds. Any portion of the true-up balance not securitized by transition bonds
will be recovered through a non-bypassable competition transition charge.
CenterPoint Houston will distribute recovery of the true-up components not used
to repay indebtedness to us through either the payment of dividends or the
settlement of intercompany payables. To maintain CenterPoint Houston's capital
structure at the appropriate levels, we may move funds back to CenterPoint
Houston, either through equity contributions or intercompany debt.
Following adoption of the true-up rule by the Texas Utility Commission in
2001, CenterPoint Houston appealed the provisions of the rule that permitted
interest to be recovered on stranded costs only from the date of the Texas
Utility Commission's final order in the 2004 True-Up Proceeding, instead of from
January 1, 2002 as CenterPoint Houston contends is required by law. On June 18,
2004, the Texas Supreme Court ruled that interest on stranded costs began to
accrue as of January 1, 2002 and remanded the rule to the Texas Utility
Commission to review the interaction between the Supreme Court's interest
decision and the Texas Utility Commission's capacity auction true-up rule and
the extent to which the capacity auction true-up results in the recovery of
interest. The Texas Utility Commission has established a procedural schedule for
a hearing to be held on this issue on September 8, 2004. We have not accrued
interest income on stranded costs in our consolidated financial statements.
RECENT EVENTS
South Texas Project Right of First Refusal
On May 28, 2004, Texas Genco announced that its Board of Directors had
voted to exercise its right of first refusal to purchase up to the entire 25.2
percent interest in the South Texas Project that is currently owned by American
Electric Power (AEP). In addition to AEP and Texas Genco, the 2,500 megawatt
nuclear plant is owned by two other co-owners. AEP had previously announced that
it had received an offer of $333 million, subject to certain adjustments, to
purchase its 630 megawatt interest. Under the South Texas Project Participation
Agreement, co-owners wishing to acquire AEP's interest are entitled to do so at
the proposed sale price. One co-owner did not exercise its right of first
refusal, while the other co-owner exercised its right to purchase at least 12
percent, or 300 megawatts. Accordingly, Texas Genco should be entitled to
purchase a 13.2 percent interest, or 330 megawatts, from AEP at an estimated
price of $175 million. Texas Genco expects to fund the purchase of its share of
AEP's interest with internally generated funds and, if and to the extent
required, a new bank credit facility. Texas Genco's purchase of a share of AEP's
interest in the South Texas Project and the acquisition of Texas Genco by GC
Power Acquisition described below are not dependent on each other. Texas Genco
expects to complete this transaction by the first quarter of 2005.
Definitive Agreement for the Sale of Texas Genco
On July 21, 2004, we and Texas Genco announced a definitive agreement for
GC Power Acquisition LLC, a newly formed entity owned in equal parts by
affiliates of The Blackstone Group, Hellman & Friedman LLC, Kohlberg Kravis
Roberts & Co. L.P. and Texas Pacific Group, to acquire Texas Genco for
approximately $3.65 billion in cash.
The transaction will be accomplished in two steps. In the first step,
expected to be completed in the fourth quarter of 2004, Texas Genco will
purchase the approximately 19% of its shares owned by the public in a cash-out
merger at a price of $47 per share. Prior to Texas Genco's public shareholder
buy-out, Texas Genco will file with the SEC a Rule 13e-3 transaction statement
and a Schedule 14C information statement relating to our adoption of the
transaction agreement and approval of the transactions it contemplates.
Following the cash-out merger of the publicly owned shares, a subsidiary of
Texas Genco that will own Texas Genco's coal, lignite and gas-fired generation
plants will merge with a subsidiary of GC Power Acquisition. The closing of the
first step of the transaction is subject to several conditions, including the
mailing of the information statement described above, the
26
receipt of debt financing under the financing commitments described below, the
expiration or termination of any applicable waiting period under the antitrust
laws (including the Hart Scott Rodino Antitrust Improvement Act of 1976) and the
FERC's certification of the entity that will own Texas Genco's coal, lignite and
gas-fired generation plants as an "exempt wholesale generator" under the 1935
Act.
In the second step of the transaction, expected to take place in the first
quarter of 2005 following receipt of approval by the Nuclear Regulatory
Commission, Texas Genco, the principal remaining asset of which, at that time,
will be its interest in the South Texas Project nuclear facility, will merge
with another subsidiary of GC Power Acquisition.
Cash proceeds to us will be approximately $2.2 billion from the first step
of the transaction and $700 million from the second step of the transaction, for
total cash proceeds of approximately $2.9 billion, or $45.25 per share for our
81% interest. We intend to use the net after-tax proceeds of approximately $2.5
billion to pay down outstanding debt, including senior debt under our bank
credit facility that is secured in part by our 81% ownership interest in Texas
Genco.
GC Power Acquisition has entered into a commitment letter with financing
sources, including Goldman Sachs, providing for up to $2.5 billion in the
aggregate in debt financing for the transaction and a separate overnight loan of
$717 million to Texas Genco to fund its public shareholder buy-out in the first
step of the transaction, each subject to customary closing conditions. This
overnight loan will be repaid with the proceeds of the merger of Texas Genco's
coal, lignite and gas-fired generation plants with a subsidiary of GC Power
Acquisition. In addition, GC Power Acquisition's sponsor firms have committed
upon closing of the transaction to provide up to $1.08 billion in the aggregate
in equity funding for the transaction.
The transaction has been approved by our board of directors and by the
board of directors of Texas Genco acting upon the unanimous recommendation of a
special committee composed of independent members of Texas Genco's board. We
have signed a written consent that satisfies all state law voting requirements
applicable to the transaction.
In connection with the transaction, Texas Genco, LP, a subsidiary of Texas
Genco, entered into a master power purchase and sale agreement with a member of
the Goldman Sachs group. Under that agreement, Texas Genco has sold forward a
substantial quantity of its available base-load capacity through 2008 and
pledged $175 million of its first mortgage bonds as collateral for its
obligations. Texas Genco's obligations under the power purchase agreement will
continue regardless of whether the transaction is completed.
As a result of this transaction, the results of Texas Genco will be
presented in discontinued operations in the third quarter of 2004 in accordance
with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". The sale will result in an
after-tax loss of approximately $250 million in the third quarter of 2004. In
addition, as a result of this transaction, any future earnings of Texas Genco
will be offset by an increase in the loss.
On July 23, 2004, two plaintiffs, both Texas Genco shareholders, filed
virtually identical lawsuits in Harris County, Texas district court. The suits,
purportedly brought on behalf of holders of Texas Genco common stock, name Texas
Genco Holdings, Inc. and each of that company's directors as defendants. Both
plaintiffs allege, among other things, self-dealing and breach of fiduciary duty
by the defendants in entering into the July 2004 agreement to sell Texas Genco.
Plaintiffs seek to enjoin the transaction or, alternatively, rescind the
transaction and/or recover damages in the event that the transaction is
consummated. Texas Genco expects the cases to be consolidated. Texas Genco
believes both lawsuits to be without merit and intends to vigorously defend
against them.
27
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2004 2003 2004
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues .................................................... $ 2,091 $ 2,241 $ 4,991 $ 5,200
Expenses .................................................... 1,745 1,933 4,284 4,557
------- ------- ------- -------
Operating Income ............................................ 346 308 707 643
Interest and Other Finance Charges .......................... (229) (210) (467) (415)
Other, net .................................................. 16 13 14 18
------- ------- ------- -------
Income From Continuing Operations Before Income
Taxes, Minority Interest and Cumulative Effect
of Accounting Change ...................................... 133 111 254 246
Income Tax Expense .......................................... (44) (38) (85) (88)
Minority Interest ........................................... (6) (15) (4) (27)
------- ------- ------- -------
Income From Continuing Operations Before
Cumulative Effect of Accounting Change .................... 83 58 165 131
Discontinued Operations, net of tax ......................... (20) -- (13) --
Cumulative Effect of Accounting Change, net of tax .......... -- -- 80 --
------- ------- ------- -------
Net Income .................................................. $ 63 $ 58 $ 232 $ 131
======= ======= ======= =======
BASIC EARNINGS PER SHARE:
Income From Continuing Operations Before
Cumulative Effect of Accounting Change .................. $ 0.27 $ 0.19 $ 0.54 $ 0.43
Discontinued Operations, net of tax ....................... (0.06) -- (0.04) --
Cumulative Effect of Accounting Change, net of
tax ..................................................... -- -- 0.27 --
------- ------- ------- -------
Net Income ................................................ $ 0.21 $ 0.19 $ 0.77 $ 0.43
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Income From Continuing Operations Before
Cumulative Effect of Accounting Change .................. $ 0.27 $ 0.19 $ 0.54 $ 0.42
Discontinued Operations, net of tax ....................... (0.06) -- (0.04) --
Cumulative Effect of Accounting Change, net of
tax ..................................................... -- -- 0.26 --
------- ------- ------- -------
Net Income ................................................ $ 0.21 $ 0.19 $ 0.76 $ 0.42
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Income from Continuing Operations. We reported income from continuing
operations of $58 million ($0.19 per diluted share) for the three months ended
June 30, 2004 as compared to $83 million ($0.27 per diluted share) for the same
period in 2003. The decrease in income from continuing operations of $25 million
was primarily due to the termination of revenues in our Electric Transmission &
Distribution business segment related to ECOM as of January 1, 2004 compared to
ECOM revenues of $101 million recorded in the second quarter of 2003, a
reduction of $16 million in operating income from our Electric Transmission &
Distribution and Natural Gas Distribution business segments due to milder
weather in the second quarter of 2004 and higher net transmission costs of $5
million related to our Electric Transmission & Distribution business segment.
These items were substantially offset by a $69 million increase in operating
income from our Electric Generation business segment, a reversal of $23 million,
including $8 million of interest, of the $117 million reserve recorded in the
fourth quarter of 2003 by our Electric Transmission & Distribution business
segment related to the final fuel reconciliation, a $7 million increase in
operating income related to customer growth in our Electric Transmission &
Distribution business segment, and a $19 million decrease in interest expense
due to lower borrowing costs.
28
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Income from Continuing Operations. We reported income from continuing
operations of $131 million ($0.42 per diluted share) for the six months ended
June 30, 2004 as compared to $165 million ($0.54 per diluted share) for the same
period in 2003 before cumulative effect of accounting change. The decrease in
income from continuing operations of $34 million was primarily due to the
termination of revenues in our Electric Transmission & Distribution business
segment related to ECOM as of January 1, 2004 compared to ECOM revenues of $233
million recorded in the first six months of 2003, a reduction of $31 million in
operating income from our Electric Transmission & Distribution and Natural Gas
Distribution business segments due to milder weather in the first six months of
2004, an $8 million charge for severance cost associated with staff reductions
in our Natural Gas Distribution business segment in 2004 and higher net
transmission costs of $4 million related to our Electric Transmission &
Distribution business segment. These items were substantially offset by a $177
million increase in operating income from our Electric Generation business
segment, a reversal of $23 million, including $8 million of interest, of the
$117 million reserve recorded in the fourth quarter of 2003 by our Electric
Transmission & Distribution business segment related to the final fuel
reconciliation, a $14 million increase in operating income related to customer
growth in our Electric Transmission & Distribution business segment, and a $52
million decrease in interest expense due to lower borrowing costs.
Cumulative Effect of Accounting Change. In connection with the adoption of
SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143),
effective January 1, 2003, we completed an assessment of the applicability and
implications of SFAS No. 143. As a result of the assessment, we identified
retirement obligations for nuclear decommissioning at the South Texas Project
and for lignite mine operations at the Jewett mine supplying the Limestone
electric generation facility. The net difference between the amounts determined
under SFAS No. 143 and the previous method of accounting for estimated mine
reclamation costs was $37 million and has been recorded as a cumulative effect
of accounting change. Upon adoption of SFAS No. 143, we reversed $115 million of
previously recognized removal costs with respect to our non-rate regulated
businesses as a cumulative effect of accounting change. The total cumulative
effect of accounting change from adoption of SFAS No. 143 was $80 million
after-tax ($152 million pre-tax). Excluded from the $80 million after-tax
cumulative effect of accounting change recorded for the three months ended March
31, 2003, is minority interest of $19 million related to the Texas Genco stock
not owned by CenterPoint Energy.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
The following table presents operating income for each of our business
segments for the three months and six months ended June 30, 2003 and 2004. Some
amounts from the previous year have been reclassified to conform to the 2004
presentation of the financial statements. These reclassifications do not affect
consolidated net income.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
(IN MILLIONS)
Electric Transmission & Distribution............... $ 235 $ 127 $ 440 $ 212
Electric Generation................................ 50 119 33 210
Natural Gas Distribution........................... 21 23 151 139
Pipelines and Gathering............................ 42 42 85 87
Other Operations................................... (2) (3) (2) (5)
----------- ----------- ----------- -----------
Total Consolidated Operating Income.......... $ 346 $ 308 $ 707 $ 643
=========== =========== =========== ===========
ELECTRIC TRANSMISSION & DISTRIBUTION
For information regarding factors that may affect the future results of
operations of our Electric Transmission & Distribution business segment, please
read "Business -- Risk Factors -- Principal Risk Factors Associated with Our
Businesses -- Risk Factors Affecting Our Electric Transmission & Distribution
Business," " -- Risk Factors Associated with Our Consolidated Financial
Condition" and "-- Other Risks" in Item 1 of the Annual Report on Form 10-K of
CenterPoint Energy for the year ended December 31, 2003 (CenterPoint Energy Form
10-K), each of which is incorporated herein by reference.
29
The following tables provide summary data of our Electric Transmission &
Distribution business segment for the three months and six months ended June 30,
2003 and 2004:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
(IN MILLIONS)
Revenues:
Electric transmission and distribution revenues.. $ 364 $ 356 $ 666 $ 670
ECOM revenues.................................... 101 -- 233 --
Transition bond revenues......................... 17 18 30 33
----------- ----------- ----------- -----------
Total revenues................................. 482 374 929 703
----------- ----------- ----------- -----------
Expenses:
Operation and maintenance........................ 126 124 259 256
Depreciation and amortization.................... 61 63 123 123
Taxes other than income taxes.................... 53 51 97 98
Transition bond expenses......................... 7 9 10 14
----------- ----------- ----------- -----------
Total expenses................................. 247 247 489 491
----------- ----------- ----------- -----------
Operating Income................................... $ 235 $ 127 $ 440 $ 212
=========== =========== =========== ===========
Actual gigawatt-hours (GWh) delivered:
Residential...................................... 6,490 5,801 11,049 10,203
Total (1)....................................... 19,086 18,545 33,874 34,065
- ----------
(1) Usage volumes for commercial and industrial customers are included in
total GWh delivered; however, the majority of these customers are billed
on a peak demand (KW) basis and, as a result, revenues do not vary based
on consumption.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Our Electric Transmission & Distribution business segment reported
operating income of $127 million for the three months ended June 30, 2004,
consisting of $118 million for the regulated electric transmission and
distribution utility and $9 million for the transition bond company. For the
three months ended June 30, 2003, operating income totaled $235 million,
consisting of $124 million for the regulated electric transmission and
distribution utility, $10 million for the transition bond company and $101
million of non-cash income associated with ECOM. ECOM is recoverable under the
Texas electric restructuring law and is included in our recently filed true-up
application. Beginning in 2004, there is no ECOM contribution to earnings. The
transition bond company's operating income represents the amount necessary to
pay interest on the transition bonds. The regulated electric transmission and
distribution utility continued to benefit from solid customer growth. Continued
customer growth contributed $7 million in operating income from the addition of
over 51,000 metered customers since June 2003. Additionally, operating income
included $15 million due to the reversal of a portion of an $87 million reserve,
excluding interest, related to the final fuel reconciliation recorded in the
fourth quarter of 2003. These amounts were more than offset by milder weather,
which negatively impacted the quarter by $14 million and higher net transmission
costs of $5 million.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Our Electric Transmission & Distribution business segment reported
operating income of $212 million for the six months ended June 30, 2004,
consisting of $193 million for the regulated electric transmission and
distribution utility and $19 million for the transition bond company. For the
six months ended June 30, 2003, operating income totaled $440 million,
consisting of $187 million for the regulated electric transmission and
distribution utility, $20 million for the transition bond company and $233
million of non-cash income associated with ECOM. Continued customer growth
contributed $14 million in operating income. Additionally, operating income
included $15 million due to a reversal of a portion of an $87 million reserve,
excluding interest, related to the final fuel reconciliation recorded in the
fourth quarter of 2003. These amounts were substantially offset by milder
weather, which negatively impacted the first six months of 2004 by $19 million
and higher net transmission costs of $4 million.
30
ELECTRIC GENERATION
For information regarding the sale of our Electric Generation business
segment, please read "Executive Summary -- Recent Events."
For information regarding factors that may affect the future results of
operations of our Electric Generation business segment, please read "Business --
Risk Factors-- Principal Risk Factors Associated with Our Businesses -- Risk
Factors Affecting Our Electric Generation Business," " -- Risk Factors
Associated with Our Consolidated Financial Condition" and "-- Other Risks" in
Item 1 of the CenterPoint Energy Form 10-K, each of which is incorporated herein
by reference.
The following tables provide summary data of our Electric Generation
business segment for the three months and six months ended June 30, 2003 and
2004:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
(IN MILLIONS)
Revenues........................................... $ 578 $ 553 $ 937 $ 992
----------- ----------- ----------- -----------
Expenses:
Fuel ........................................... 349 264 557 451
Purchased power.................................. 23 18 35 26
Operation and maintenance........................ 105 99 211 200
Depreciation and amortization.................... 39 41 78 81
Taxes other than income taxes.................... 12 12 23 24
----------- ----------- ----------- -----------
Total expenses................................. 528 434 904 782
----------- ----------- ----------- -----------
Operating Income .................................. $ 50 $ 119 $ 33 $ 210
=========== =========== =========== ===========
Sales (in GWh)..................................... 12,517 11,962 21,794 22,683
Generation (in GWh)................................ 12,078 11,542 21,072 21,691
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Our Electric Generation business segment's operating income for the three
months ended June 30, 2004 was $119 million compared to $50 million for the same
period in 2003 primarily due to higher capacity revenue for base-load products
driven by continued high natural gas prices and their effect on wholesale
electricity prices in the Electric Reliability Council of Texas (ERCOT) market.
Most of these base-load products were sold in capacity auctions held when
natural gas prices were higher than when we sold our capacity for 2003.
Additionally, the sale of surplus air emission allowances contributed $6 million
to revenues. Energy revenues and fuel and purchased power costs declined in the
second quarter of 2004 as compared to the same period in 2003, reflecting a
reduction in planned and unplanned outages and therefore an increase in
availability of our lower-cost base-load units in 2004 as well as lower demand
for gas-fired generation products. Operation and maintenance expenses decreased
$6 million primarily due to the reduction in planned and unplanned outages in
the second quarter of 2004 as compared to the same period in 2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Our Electric Generation business segment's operating income for the six
months ended June 30, 2004 was $210 million compared to $33 million for the same
period in 2003. Revenues increased $55 million in the first six months of 2004
as compared to the same period in 2003 due to higher capacity revenue for
base-load products driven by continued high natural gas prices and their effect
on wholesale electricity prices in the ERCOT market. Most of these base-load
products were sold in capacity auctions held when natural gas prices were higher
than when we sold our capacity for 2003. Additionally, the sale of surplus air
emission allowances contributed $10 million to the increase in revenues. Fuel
and purchased power costs declined $115 million in the first six months of 2004
as compared to the same period in 2003 reflecting a reduction in planned and
unplanned outages and therefore an increase in availability of our lower-cost
base-load units in 2004 as well as lower demand for gas-fired generation
products. Operation and maintenance expenses decreased $11 million primarily due
to the reduction in planned and unplanned outages in the first six months of
2004 as compared to the same period in 2003.
31
NATURAL GAS DISTRIBUTION
For information regarding factors that may affect the future results of
operations of our Natural Gas Distribution business segment, please read
"Business -- Risk Factors -- Principal Risk Factors Associated with Our
Businesses -- Risk Factors Affecting Our Natural Gas Distribution and Pipelines
and Gathering Businesses," " -- Risk Factors Associated with Our Consolidated
Financial Condition" and "-- Other Risks" in Item 1 of the CenterPoint Energy
Form 10-K, each of which is incorporated herein by reference.
The following table provides summary data of our Natural Gas Distribution
business segment for the three months and six months ended June 30, 2003 and
2004:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
(IN MILLIONS)
Revenues........................................... $ 971 $ 1,245 $ 3,015 $ 3,376
----------- ----------- ----------- -----------
Expenses:
Natural gas...................................... 761 1,027 2,455 2,817
Operation and maintenance........................ 137 133 284 283
Depreciation and amortization.................... 34 35 67 70
Taxes other than income taxes.................... 18 27 58 67
----------- ----------- ----------- -----------
Total expenses................................. 950 1,222 2,864 3,237
----------- ----------- ----------- -----------
Operating Income................................... $ 21 $ 23 $ 151 $ 139
=========== =========== =========== ===========
Throughput (in billion cubic feet (Bcf)):
Residential...................................... 20 21 114 106
Commercial and industrial........................ 39 49 128 132
Non-rate regulated commercial and industrial..... 116 167 245 306
Elimination...................................... (25) (63) (40) (73)
----------- ----------- ----------- -----------
Total Throughput............................... 150 174 447 471
=========== =========== =========== ===========
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Our Natural Gas Distribution business segment reported operating income of
$23 million for the three months ended June 30, 2004 as compared to $21 million
for the same period in 2003. Continued customer growth, with the addition of
approximately 45,000 customers since June 2003, higher revenues from rate
increases and lower operation and maintenance expense primarily due to decreased
employee-related expenses and contract services were substantially offset by the
$2 million impact of milder weather and reduced operating income from our
competitive commercial and industrial sales business due to less volatile market
conditions than in 2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Our Natural Gas Distribution business segment reported operating income of
$139 million for the six months ended June 30, 2004 as compared to $151 million
for the same period in 2003. Continued customer growth and $3 million in rate
increases were more than offset by the $12 million impact of milder weather and
reduced operating income from our competitive commercial and industrial sales
business due to less volatile market conditions than in 2003. Operations and
maintenance expense decreased $1 million for the six months ended June 30, 2004
as compared to the same period in 2003. Excluding an $8 million charge for
severance costs associated with staff reductions in the first quarter of 2004,
which will reduce costs in future periods, operation and maintenance expenses
decreased by $9 million.
PIPELINES AND GATHERING
For information regarding factors that may affect the future results of
operations of our Pipelines and Gathering business segment, please read
"Business -- Risk Factors -- Principal Risk Factors Associated with Our
Businesses -- Risk Factors Affecting Our Natural Gas Distribution and Pipelines
and Gathering Businesses," " -- Risk Factors
32
Associated with Our Consolidated Financial Condition" and "-- Other Risks" in
Item 1 of the CenterPoint Energy Form 10-K, each of which is incorporated herein
by reference.
The following table provides summary data of our Pipelines and Gathering
business segment for the three months and six months ended June 30, 2003 and
2004:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
(IN MILLIONS)
Revenues........................................... $ 122 $ 113 $ 231 $ 216
----------- ----------- ----------- -----------
Expenses:
Natural gas...................................... 35 18 56 28
Operation and maintenance........................ 30 37 60 70
Depreciation and amortization.................... 11 11 21 22
Taxes other than income taxes.................... 4 5 9 9
----------- ----------- ----------- -----------
Total expenses................................. 80 71 146 129
----------- ----------- ----------- -----------
Operating Income................................... $ 42 $ 42 $ 85 $ 87
=========== =========== =========== ===========
Throughput (in Bcf):
Natural Gas Sales................................ 4 4 8 7
Transportation................................... 203 207 471 477
Gathering........................................ 74 79 146 154
Elimination (1).................................. (2) (3) (4) (5)
----------- ----------- ----------- -----------
Total Throughput.............................. 279 287 621 633
=========== =========== =========== ===========
- ----------
(1) Elimination of volumes both transported and sold.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Our Pipelines and Gathering business segment reported operating income of
$42 million for both the three months ended June 30, 2004 and the same period in
2003. Operating margins (revenues less natural gas costs) increased primarily
due to increased utilization of certain pipeline transportation services,
increased throughput and enhanced services related to our gas gathering
operations and higher third-party project-related revenues. The increase in
operating margin was offset by higher operation and maintenance expenses
increased primarily due to spending related to compliance with pipeline
integrity regulations, project related costs and higher employee-related costs.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Our Pipelines and Gathering business segment reported operating income of
$87 million for the six months ended June 30, 2004 compared to $85 million for
the same period in 2003. The improvement was primarily due to increased
utilization of certain pipeline transportation services, increased throughput
and enhanced services related to our gas gathering operations and higher
third-party project-related revenues. Operation and maintenance expenses
increased primarily due to spending related to compliance with pipeline
integrity regulations, project related costs and higher employee-related costs.
33
OTHER OPERATIONS
The following table shows operating loss of our Other Operations business
segment for the three months and six months ended June 30, 2003 and 2004:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
(IN MILLIONS)
Revenues........................................... $ 9 $ 3 $ 18 $ 6
Expenses........................................... 11 6 20 11
----------- ----------- ----------- -----------
Operating Loss..................................... $ (2) $ (3) $ (2) $ (5)
=========== =========== =========== ===========
DISCONTINUED OPERATIONS
In February 2003, we sold our interest in Argener, a cogeneration facility
in Argentina, for $23 million. The carrying value of this investment was
approximately $11 million as of December 31, 2002. We recorded an after-tax gain
of $7 million from the sale of Argener in the first quarter of 2003. In April
2003, we sold our final remaining investment in Argentina, a 90 percent interest
in Empresa Distribuidora de Electricidad de Santiago del Estero S.A. We recorded
an after-tax loss of $3 million in the second quarter of 2003 related to our
Latin America operations. We have completed our strategy of exiting all of our
international investments. The Interim Financial Statements present these
operations as discontinued operations in accordance with SFAS No. 144 for the
three months and six months ended June 30, 2003.
In November 2003, we sold a component of our Other Operations business
segment, CenterPoint Energy Management Services, Inc. (CEMS), that provides
district cooling services in the Houston central business district and related
complementary energy services to district cooling customers and others. We
recorded an after-tax loss in discontinued operations of $16 million ($25
million pre-tax) during the second quarter of 2003 to record the impairment of
the CEMS long-lived assets based on the impending sale and to record one-time
employee termination benefits. The Interim Financial Statements present these
operations as discontinued operations in accordance with SFAS No. 144 for the
three months and six months ended June 30, 2003.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
For information on other developments, factors and trends that may have an
impact on our future earnings, please read the factors listed under "Cautionary
Statement Regarding Forward-Looking Information" on Page ii of this Form 10-Q,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Earnings" in Item 7 of Part II of
the CenterPoint Energy Form 10-K and "Risk Factors" in Item 1 of Part I of the
CenterPoint Energy Form 10-K, each of which is incorporated herein by reference.
In addition to these factors, the discontinuance of non-cash operating income
associated with ECOM will negatively impact our earnings in 2004 as compared to
2003. Additionally, the after-tax loss of approximately $250 million associated
with the sale of our interest in Texas Genco will negatively impact our earnings
in the third quarter of 2004.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL CASH FLOWS
The following table summarizes the net cash provided by (used in)
operating, investing and financing activities for the six months ended June 30,
2003 and 2004:
SIX MONTHS ENDED JUNE 30,
---------------------------------
2003 2004
-------------- --------------
(IN MILLIONS)
Cash provided by (used in):
Operating activities..................... $ 242 $ 690
Investing activities..................... (299) (257)
Financing activities..................... (211) (284)
34
CASH PROVIDED BY OPERATING ACTIVITIES
Cash provided by operating activities increased $448 million for the six
months ended June 30, 2004 as compared to the same period in 2003 primarily due
to increased cash flow from Texas Genco, substantially due to higher capacity
revenues driven by continued high natural gas prices ($146 million), and
decreased accounts receivable attributable to a higher level of accounts
receivable being sold under CERC Corp.'s receivables facility ($100 million).
Additionally, other changes in working capital items, primarily decreased net
accounts receivable and accounts payable due to the impact of colder weather and
higher natural gas prices in December 2003 as compared to December 2002 ($172
million), contributed to the overall increase in cash provided by operating
activities.
CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities decreased $42 million for the six
months ended June 30, 2004 as compared to the same period in 2003 due primarily
to a planned reduction in environmental-related capital expenditures in our
Electric Generation business segment and decreased capital expenditures in our
Electric Transmission & Distribution business segment primarily resulting from
delayed spending due to inclement weather.
CASH USED IN FINANCING ACTIVITIES
During the first six months of 2004, debt payments exceeded net loan
proceeds by $222 million. During the first six months of 2003, debt payments
exceeded net loan proceeds by $147 million.
FUTURE SOURCES AND USES OF CASH
Our liquidity and capital requirements will be affected by:
- the sale of our 81% ownership interest in Texas Genco;
- the amount and timing of receipt of true-up proceeds, including the
effects of any appeal from the true-up proceeding and whether or not
transition bonds are issued;
- purchase of an additional interest in the South Texas Project
pursuant to the exercise of Texas Genco's right of first refusal as
described above under "--Executive Summary--Recent Events";
- capital expenditures;
- debt service requirements;
- various regulatory actions; and
- working capital requirements.
The 1935 Act regulates our financing ability, as more fully described in
"--Certain Contractual and Regulatory Limits on Ability to Issue Securities and
Pay Dividends on Our Common Stock" below.
Off-Balance Sheet Arrangements. Other than operating leases, we have no
off-balance sheet arrangements. However, we do participate in a receivables
factoring arrangement. On January 21, 2004, CERC Corp. replaced its $100 million
receivables facility with a $250 million receivables facility. The $250 million
receivables facility terminates on January 19, 2005. As of June 30, 2004, CERC
Corp. had $173 million outstanding under its receivables facility.
Long-term and Short-term Debt. Our long-term debt consists of our
obligations and the obligations of our subsidiaries, including transition bonds
issued by an indirect wholly owned subsidiary (transition bonds).
35
As of June 30, 2004, we had the following revolving credit facilities (in
millions):
SIZE OF AMOUNT
FACILITY AT UTILIZED AT
JUNE 30, JUNE 30,
DATE EXECUTED COMPANY 2004 2004 TERMINATION DATE
------------- ------- ---- --- ----------------
March 23, 2004 CERC Corp. $ 250 $ -- March 23, 2007
October 7, 2003 CenterPoint Energy 1,425 705 October 7, 2006
December 23, 2003 Texas Genco, LP 75 -- December 21, 2004
On June 30, 2004, we had temporary investments of $243 million.
At June 30, 2004, CenterPoint Energy had filed with the SEC a shelf
registration statement covering senior debt securities, preferred stock and
common stock aggregating $1 billion, but such registration statement had not
been declared effective. At June 30, 2004, CERC Corp. had a shelf registration
statement covering $50 million principal amount of debt securities.
Cash Requirements in 2004. Our liquidity and capital requirements are
affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs. Our principal cash requirements
during the second half of 2004, assuming we continue to own our interest in
Texas Genco for the full year, include the following:
- approximately $447 million of capital expenditures;
- an estimated $130 million in refunds by CenterPoint Houston of
excess mitigation credits through December 31, 2004;
- dividend payments on CenterPoint Energy common stock; and
- $32 million of maturing long-term debt, including $27 million of
transition bonds.
We expect that revolving credit borrowings and anticipated cash flows from
operations will be sufficient to meet our cash needs for 2004. Our $2.3 billion
credit facility, which consisted of a $918 million term loan and a $1.425
billion revolver at June 30, 2004, provides that, until such time as the credit
facility has been reduced to $750 million, all of the net cash proceeds from any
securitizations relating to the recovery of the true-up components, after making
any payments required under CenterPoint Houston's term loan, and the net cash
proceeds of any sales of the common stock of Texas Genco that we own, or of
material portions of Texas Genco's assets, shall be applied to repay borrowings
under our credit facility and reduce the amount available under the credit
facility. Our $2.3 billion credit facility contains no other restrictions with
respect to our use of proceeds from financing activities. CenterPoint Houston's
term loan requires the proceeds from the issuance of transition bonds to be used
to reduce the term loan unless refused by the lenders. CenterPoint Houston's
term loan, subject to certain exceptions, limits the application of proceeds
from capital markets transactions by CenterPoint Houston over $200 million to
repayment of debt existing in November 2002.
CenterPoint Houston will distribute recovery of the true-up components not
used to repay indebtedness to us through either the payment of dividends or the
settlement of intercompany payables. To maintain CenterPoint Houston's capital
structure at the appropriate levels, we may move funds back to CenterPoint
Houston, either through equity contributions or intercompany debt. Under the
orders described under "-- Certain Contractual and Regulatory Limits on Ability
to Issue Securities and Pay Dividends on Our Common Stock," CenterPoint
Houston's member's equity as a percentage of total capitalization must be at
least 30%, although the SEC has permitted the percentage to be below this level
for other companies taking into account non-recourse securitization debt as a
component of capitalization.
Impact on Liquidity of a Downgrade in Credit Ratings. As of June 30, 2004,
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 debt of CenterPoint Energy and
certain subsidiaries:
36
MOODY'S S&P FITCH
-------------------- -------------------- --------------------
COMPANY/INSTRUMENT RATING OUTLOOK(1) RATING OUTLOOK(2) RATING OUTLOOK(3)
- ------------------ ------ ---------- ------ ---------- ------ ----------
CenterPoint Energy Senior Unsecured
Debt................................... Ba2 Negative BBB- Negative BBB- Negative
CenterPoint Houston Senior Secured
Debt (First Mortgage Bonds)............ Baa2 Negative BBB Negative BBB+ Negative
CERC Corp. Senior Debt................... Ba1 Stable BBB Negative BBB Negative
- ----------
(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. A "stable" outlook from Moody's indicates that
Moody's does not expect to put the rating on review for an upgrade or
downgrade within 18 months from when the outlook was assigned or last
affirmed.
(2) An S&P rating outlook assesses the potential direction of a long-term
credit rating over the intermediate to longer term.
(3) A "negative" outlook from Fitch encompasses a one-to-two year horizon as
to the likely ratings direction.
On April 30, 2004, Moody's announced that it had changed the CERC outlook
to stable from negative. Moody's explained in its announcement that the action
was to reflect the mitigation of concerns that underlay its negative outlook
including CERC 's establishment of a steady operating track record as a
subsidiary of CenterPoint Energy, CERC's establishment of adequate stand-alone
liquidity, CERC's progress made in addressing certain regulatory issues and
greater comfort with the ringfencing protections provided to CERC by the 1935
Act.
We cannot assure you that these ratings will remain in effect for any
given period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our business strategies.
A decline in credit ratings would increase borrowing costs under CERC's
$250 million 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.
If we were unable to maintain an investment-grade rating from at least one
rating agency, as a registered public utility holding company we would be
required to obtain further approval from the SEC for any additional capital
markets transactions as more fully described in "-- Certain Contractual and
Regulatory Limits on Ability to Issue Securities and Pay Dividends on Our Common
Stock" below. Additionally, a decline in credit ratings could increase cash
collateral requirements and reduce margins of our Natural Gas Distribution
business segment.
Our revolving credit facilities contain "material adverse change" clauses
that could impact our ability to make new borrowings under these facilities. The
"material adverse change" clauses in our revolving credit facilities generally
relate to an event, development or circumstance that has or would reasonably be
expected to have a material adverse effect on (a) the business, financial
condition or operations of the borrower and its subsidiaries taken as a whole,
or (b) the legality, validity or enforceability of the loan documents.
In September 1999, we issued 2.0% Zero-Premium Exchangeable Subordinated
Notes due 2029 (ZENS) having an original principal amount of $1.0 billion. Each
ZENS note is exchangeable at the holder's option at any time for an amount of
cash equal to 95% of the market value of the reference shares of Time Warner
Inc. (TW Common) attributable to each ZENS note. If our creditworthiness were to
drop such that ZENS note holders thought our liquidity was adversely affected or
the market for the ZENS notes were to become illiquid, some ZENS noteholders
might decide to exchange their ZENS notes for cash. Funds for the payment of
cash upon exchange could be obtained from the sale of the shares of TW Common
that we own or from other sources. We own shares of TW Common equal to 100% of
the reference shares used to calculate our obligation to the holders of the ZENS
notes. ZENS note exchanges result in a cash outflow because deferred tax
liabilities related to the ZENS notes and TW Common shares become current tax
obligations when ZENS notes are exchanged and TW Common shares are sold.
37
CenterPoint Energy Gas Services, Inc. (CEGS), a wholly owned subsidiary of
CERC Corp., provides comprehensive natural gas sales and services to industrial
and commercial customers, which are primarily located within or near the
territories served by our pipelines and natural gas distribution subsidiaries.
In order to hedge its exposure to natural gas prices, CEGS has agreements with
provisions standard for the industry that establish credit thresholds and
require a party to provide additional collateral on two business days' notice
when that party's rating or the rating of a credit support provider for that
party (CERC Corp. in this case) falls below those levels. As of June 30, 2004,
the senior unsecured debt of CERC Corp. was rated BBB by S&P and Ba1 by Moody's.
We estimate that as of June 30, 2004, unsecured credit limits related to hedge
instruments extended to CEGS by counterparties could aggregate $95 million;
however, utilized credit capacity is significantly lower.
Cross Defaults. Under our revolving credit facility and our term loan, a
payment default on, or a non-payment default that permits acceleration of, any
indebtedness exceeding $50 million by us or any of our significant subsidiaries
will cause a default. Pursuant to the indenture governing our senior notes, a
payment default by us, CERC Corp. or CenterPoint Houston in respect of, or an
acceleration of, borrowed money and certain other specified types of
obligations, in the aggregate principal amount of $50 million will cause a
default. As of June 30, 2004, we had issued five series of senior notes
aggregating $1.4 billion in principal amount under this indenture. A default by
CenterPoint Energy would not trigger a default under our subsidiaries' debt
instruments.
Pension Plan. As discussed in Note 10(b) to the consolidated annual
financial statements in the CenterPoint Energy Form 10-K (CenterPoint Energy
Notes), which is incorporated herein by reference, we maintain a
non-contributory pension plan covering substantially all employees. Employer
contributions are based on actuarial computations that establish the minimum
contribution required under the Employee Retirement Income Security Act of 1974
(ERISA) and the maximum deductible contribution for income tax purposes. At
December 31, 2003, the projected benefit obligation exceeded the market value of
plan assets by $498 million. In September 2003, we elected to make a $22.7
million contribution to our pension plan. As a result, we will not be required
to make any contributions to our pension plan prior to 2005; however, we may
elect to make a voluntary contribution in 2004. Changes in interest rates and
the market values of the securities held by the plan during 2004 could
materially, positively or negatively, change our under-funded status and affect
the level of pension expense and required contributions in 2005 and beyond. Plan
assets used to satisfy pension obligations have been adversely impacted by the
decline in equity market values prior to 2003. In connection with the expected
sale of our 81% interest in Texas Genco, a separate pension plan will be
established for Texas Genco in the third quarter of 2004. Texas Genco will
receive an allocation of assets from our pension plan pursuant to rules and
regulations under the Employee Retirement Income Security Act of 1974 and we
will transfer a pension liability of approximately $68 million to Texas Genco.
Under the terms of our pension plan, we reserve the right to change,
modify or terminate the plan. Our funding policy is to review amounts annually
and contribute an amount at least equal to the minimum contribution required
under ERISA and the Internal Revenue Code (Code).
In accordance with SFAS No. 87, "Employers' Accounting for Pensions,"
changes in pension obligations and assets may not be immediately recognized as
pension costs in the income statement, but generally are recognized in future
years over the remaining average service period of plan participants. As such,
significant portions of pension costs recorded in any period may not reflect the
actual level of benefit payments provided to plan participants.
Pension costs were $22 million for both the three months ended June 30,
2003 and 2004. Pension costs were $45 million and $41 million for the six months
ended June 30, 2003 and 2004, respectively. Additionally, we maintain a
non-qualified benefit restoration plan which allows participants to retain the
benefits to which they would have been entitled under our non-contributory
pension plan except for the Code mandated limits on these benefits or on the
level of compensation on which these benefits may be calculated. The expense
associated with this non-qualified plan was $2 million for both the three months
ended June 30, 2003 and 2004. The expense associated with this non-qualified
plan was $4 million and $3 million for the six months ended June 30, 2003 and
2004, respectively.
The calculation of pension expense and related liabilities requires the
use of assumptions. Changes in these assumptions can result in different expense
and liability amounts, and future actual experience can differ from the
assumptions. Two of the most critical assumptions are the expected long-term
rate of return on plan assets and the assumed discount rate.
38
As of December 31, 2003, the expected long-term rate of return on plan
assets was 9.0%. We believe that our actual asset allocation on average will
approximate the targeted allocation and the estimated return on net assets. We
regularly review our actual asset allocation and periodically rebalance plan
assets as appropriate.
As of December 31, 2003, the projected benefit obligation was calculated
assuming a discount rate of 6.25%, which is a 0.5% decline from the 6.75%
discount rate assumed in 2002. The discount rate was determined by reviewing
yields on high-quality bonds that receive one of the two highest ratings given
by a recognized rating agency and the expected duration of pension obligation
specific to the characteristics of our plan.
Pension expense for 2004, including the benefit restoration plan, is
estimated to be $85 million, including $3 million of non-recurring early
retirement expenses, based on an expected return on plan assets of 9.0% and a
discount rate of 6.25% as of December 31, 2003. If the expected return
assumption were lowered by 0.5% (from 9.0% to 8.5%), 2004 pension expense would
increase by approximately $6 million. Similarly, if the discount rate were
lowered by 0.5% (from 6.25% to 5.75%), this assumption change would increase our
projected benefit obligation, pension liabilities and 2004 pension expense by
approximately $121 million, $111 million and $10 million, respectively. In
addition, the assumption change would result in an additional charge to
comprehensive income during 2004 of $72 million, net of tax.
Primarily due to the decline in the market value of the pension plan's
assets and increased benefit obligations associated with a reduction in the
discount rate, the value of the plan's assets is less than our accumulated
benefit obligation. In December 2003, we recorded a minimum liability adjustment
in the Consolidated Balance Sheet ($72 million decrease in pension liability) to
reflect a liability equal to the unfunded accumulated benefit obligation, with
an offsetting credit of $47 million to equity, net of a $25 million deferred tax
effect.
Future changes in plan asset returns, assumed discount rates and various
other factors related to the pension plan will impact our future pension expense
and liabilities. 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:
- cash collateral requirements that could exist in connection with
certain contracts, including gas purchases, gas price hedging and
gas storage activities of our Natural Gas Distribution business
segment, particularly given gas price levels and volatility;
- acceleration of payment dates on certain gas supply contracts under
certain circumstances, as a result of increased gas prices and
concentration of suppliers;
- increased costs related to the acquisition of gas for storage;
- various regulatory actions; and
- the ability of RRI and its subsidiaries to satisfy their obligations
as the principal customers of CenterPoint Houston and Texas Genco
and in respect of RRI's indemnity obligations to us and our
subsidiaries.
Money Pool. We have two "money pools" through which our participating
subsidiaries 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. Prior to October 2003, we had only one money pool. Following Texas
Genco's certification by the FERC as an "exempt wholesale generator" under the
1935 Act in October 2003, it could no longer participate with our regulated
subsidiaries in the same money pool. In October 2003, we established a second
money pool in which Texas Genco and certain of our other unregulated
subsidiaries can participate.
The net funding requirements of the money pool in which our regulated
subsidiaries participate are expected to be met with borrowings under credit
facilities. Except in an emergency situation (in which case we could provide
funding pursuant to applicable SEC rules), we would be required to obtain
approval from the SEC to issue and sell securities for purposes of funding Texas
Genco's operations via the money pool established in October 2003. The terms of
both money pools are in accordance with requirements applicable to registered
public utility holding
39
companies under the 1935 Act and under an order from the SEC relating to our
financing activities and those of our subsidiaries on June 30, 2003 (June 2003
Financing Order).
Certain Contractual and Regulatory Limits on Ability to Issue Securities
and Pay Dividends on Our Common Stock. Factors affecting our ability to issue
securities, pay dividends on our common stock or take other actions that affect
our capitalization include:
- a $0.10 per share per quarter limitation on common stock dividend
payments under our $2.3 billion revolving credit and term loan
facility;
- covenants and other provisions in our credit or loan facilities and
the credit facilities and receivables facility of our subsidiaries
and other borrowing agreements; and
- limitations imposed on us as a registered public utility holding
company under the 1935 Act.
The collateralized term loan of CenterPoint Houston limits CenterPoint
Houston's debt, excluding transition bonds, as a percentage of its total
capitalization to 68%. CERC Corp.'s bank facility and its receivables facility
limit CERC's debt as a percentage of its total capitalization to 60% and contain
an earnings before interest, taxes, depreciation and amortization (EBITDA) to
interest covenant. Our $2.3 billion credit facility: limits dividend payments as
described above; contains a debt to EBITDA covenant; contains an EBITDA to
interest covenant; and provides that, until such time as the credit facility has
been reduced to $750 million, all of the net cash proceeds from any
securitizations relating to the recovery of the true-up components, after making
any payments required under CenterPoint Houston's term loan, and the net cash
proceeds of any sales of the common stock of Texas Genco that we own, or of
material portions of Texas Genco's assets, shall be applied to repay borrowings
under our credit facility and reduce the amount available under the credit
facility. These facilities include certain restrictive covenants. We and our
subsidiaries are in compliance with such covenants.
We are a registered public utility holding company under the 1935 Act. The
1935 Act and related rules and regulations impose a number of restrictions on
our activities and those of our subsidiaries. The 1935 Act, among other things,
limits our ability and the ability of our regulated subsidiaries to issue debt
and equity securities without prior authorization, restricts the source of
dividend payments to current and retained earnings without prior authorization,
regulates sales and acquisitions of certain assets and businesses and governs
affiliate transactions.
The June 2003 Financing Order is effective until June 30, 2005.
Additionally, we have received several subsequent orders which provide
additional financing authority. These orders establish limits on the amount of
external debt and equity securities that can be issued by us and our regulated
subsidiaries without additional authorization but generally permit us to
refinance our existing obligations and those of our subsidiaries. Each of us and
our subsidiaries is in compliance with the authorized limits. Discussed below
are the incremental amounts of debt and equity that we are authorized to issue
after giving effect to our capital markets transactions in 2003 and the first
four months of 2004. The orders also permit utilization of undrawn credit
facilities at CenterPoint Energy and CERC. As of June 30, 2004:
- CenterPoint Energy is authorized to issue an additional aggregate
$293 million of debt securities and $250 million of preferred stock
and preferred securities;
- CenterPoint Houston is authorized to issue an additional aggregate
$47 million of debt and an aggregate $250 million of preferred stock
and preferred securities; and
- CERC is authorized to issue an additional $2 million of debt and an
additional aggregate $250 million of preferred stock and preferred
securities.
The SEC has reserved jurisdiction over, and must take further action to
permit, the issuance of $478 million of additional debt at CenterPoint Energy,
$430 million of additional debt at CERC and $250 million of additional debt at
CenterPoint Houston.
The orders require that if we or any of our regulated subsidiaries issue
securities that are rated by a nationally recognized statistical rating
organization (NRSRO), the security to be issued must obtain an investment grade
rating
40
from at least one NRSRO and, as a condition to such issuance, all outstanding
rated securities of the issuer and of CenterPoint Energy must be rated
investment grade by at least one NRSRO. The orders also contain certain
requirements for interest rates, maturities, issuance expenses and use of
proceeds.
The 1935 Act limits the payment of dividends to payment from current and
retained earnings unless specific authorization is obtained to pay dividends
from other sources. The SEC has reserved jurisdiction over payment of $500
million of dividends from CenterPoint Energy's unearned surplus or capital.
Further authorization would be required to make those payments. As of June 30,
2004, we had a retained deficit on our Consolidated Balance Sheets. The sale of
our interest in Texas Genco will result in an after-tax loss of approximately
$250 million in the third quarter of 2004. In addition, the 2004 True-Up
Proceeding could also result in charges against our earnings. The loss related
to Texas Genco will reduce our earnings below the level required for us to
continue paying our current quarterly dividends out of current earnings as
required under our SEC financing order. However, in May 2004, we received an
order from the SEC under the 1935 Act authorizing us to continue to pay our
current quarterly dividend in the second and third quarters of 2004 out of
capital or unearned surplus in the event we take such a charge against earnings.
If our earnings for the fourth quarter of 2004 or subsequent quarters are
insufficient to pay dividends from current earnings due to these or other
factors, additional authority would be required from the SEC for payment of the
quarterly dividend from capital or unearned surplus, but there can be no
assurance that the SEC would authorize such payments. Any such charges would
also reduce our shareholders' equity. Any such reduction could adversely affect
our ability to achieve a ratio of common equity to total capitalization of 30%
by the end of 2006, as has been represented in filings under the 1935 Act.
Depending on the magnitude of such reduction, we may need to issue equity and/or
take other action to achieve that ratio. The June 2003 Financing Order also
requires that CenterPoint Houston and CERC maintain a ratio of common equity to
total capitalization of thirty percent.
Security Interests in Receivables of RRI. Pursuant to a Master Power
Purchase and Sale Agreement with a subsidiary of RRI related to power sales in
the ERCOT market, Texas Genco has been granted a security interest in accounts
receivable and/or notes associated with the accounts receivable of certain
subsidiaries of RRI to secure up to $250 million in purchase obligations.
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. Our significant accounting policies are discussed in Note 2 to the
CenterPoint Energy Notes. We believe the following accounting policies involve
the application of critical accounting estimates. Accordingly, these accounting
estimates have been reviewed and discussed with the audit committee of the board
of directors.
ACCOUNTING FOR RATE REGULATION
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71), provides that rate-regulated entities account for and report
assets and liabilities consistent with the recovery of those incurred costs in
rates if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it probable that
such rates can be charged and collected. Application of SFAS No. 71 to the
electric generation portion of our business was discontinued as of June 30,
1999. Our Electric Transmission & Distribution business continues to apply SFAS
No. 71 which results in our accounting for the
41
regulatory effects of recovery of stranded costs and other regulatory assets
resulting from the unbundling of the transmission and distribution business from
our electric generation operations in our consolidated financial statements.
Certain expenses and revenues subject to utility regulation or rate
determination normally reflected in income are deferred on the balance sheet and
are recognized in income as the related amounts are included in service rates
and recovered from or refunded to customers. Significant accounting estimates
embedded within the application of SFAS No. 71 with respect to our Electric
Transmission & Distribution business segment relate to $3.4 billion of
recoverable electric generation-related regulatory assets as of June 30, 2004.
These costs are recoverable under the provisions of the Texas electric
restructuring law. The ultimate amount of cost recovery is subject to a final
determination, which will occur in 2004. An adverse determination could result
in a material write-down of these regulatory assets.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We review the carrying value of our long-lived assets, including goodwill
and identifiable intangibles, whenever events or changes in circumstances
indicate that such carrying values may not be recoverable, and annually for
goodwill as required by SFAS No. 142, "Goodwill and Other Intangible Assets." No
impairment of goodwill was indicated based on our analysis as of January 1,
2004. Unforeseen events and changes in circumstances and market conditions and
material differences in the value of long-lived assets and intangibles due to
changes in estimates of future cash flows, regulatory matters and operating
costs could negatively affect the fair value of our assets and result in an
impairment charge.
Fair value is the amount at which the asset could be bought or sold in a
current transaction between willing parties and may be estimated using a number
of techniques, including quoted market prices or valuations by third parties,
present value techniques based on estimates of cash flows, or multiples of
earnings or revenue performance measures. The fair value of the asset could be
different using different estimates and assumptions in these valuation
techniques.
UNBILLED ENERGY REVENUES
Revenues related to the sale and/or delivery of electricity or natural gas
(energy) are generally recorded when energy is delivered to customers. However,
the determination of energy 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 energy delivered to customers since
the date of the last meter reading are estimated and the corresponding unbilled
revenue is estimated. Unbilled electric delivery revenue is estimated each month
based on daily supply volumes, applicable rates and analyses reflecting
significant historical trends and experience. Unbilled natural gas sales are
estimated based on estimated purchased gas volumes, estimated lost and
unaccounted for gas and tariffed rates in effect. As additional information
becomes available, or actual amounts are determinable, the recorded estimates
are revised. Consequently, operating results can be affected by revisions to
prior accounting estimates.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 4 to the Interim Financial Statements for a discussion of new
accounting pronouncements that affect us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
We assess the risk of our non-trading derivatives (Energy Derivatives)
using a sensitivity analysis method.
The sensitivity analysis performed on our Energy Derivatives measures the
potential loss based on a hypothetical 10% movement in energy prices. A decrease
of 10% in the market prices of energy commodities from their June 30, 2004
levels would have decreased the fair value of our Energy Derivatives from their
levels on that date by $28 million.
42
The above analysis of the Energy Derivatives utilized for hedging purposes
does not include the favorable impact that the same hypothetical price movement
would have on our physical purchases and sales of natural gas to which the
hedges relate. The Energy Derivative portfolio is managed to complement the
physical transaction portfolio, reducing overall risks within limits. Therefore,
the adverse impact to the fair value of the portfolio of Energy Derivatives held
for hedging purposes associated with the hypothetical changes in commodity
prices referenced above would be offset by a favorable impact on the underlying
hedged physical transactions.
INTEREST RATE RISK
We have outstanding long-term debt, bank loans, mandatory redeemable
preferred securities of subsidiary trusts holding solely our junior subordinated
debentures (Trust Preferred Securities), securities held in our nuclear
decommissioning trusts, some lease obligations and our obligations under the
ZENS that subject us to the risk of loss associated with movements in market
interest rates.
Our floating-rate obligations to third parties aggregated $3 billion at
June 30, 2004. If the floating rates were to increase by 10% from June 30, 2004
rates, our combined interest expense to third parties would increase by a total
of $2 million each month in which such increase continued.
At June 30, 2004, we had outstanding fixed-rate debt (excluding indexed
debt securities) and trust preferred securities aggregating $8 billion in
principal amount and having a fair value of $8 billion. These instruments are
fixed-rate and, therefore, do not expose us to the risk of loss in earnings due
to changes in market interest rates. However, the fair value of these
instruments would increase by approximately $400 million if interest rates were
to decline by 10% from their levels at June 30, 2004. In general, such an
increase in fair value would impact earnings and cash flows only if we were to
reacquire all or a portion of these instruments in the open market prior to
their maturity.
As discussed in Note 12(e) to the CenterPoint Energy Notes, which note is
incorporated herein by reference, CenterPoint Houston contributes $2.9 million
per year to trusts established to fund Texas Genco's share of the
decommissioning costs for the South Texas Project. The securities held by the
trusts for decommissioning costs had an estimated fair value of $198 million as
of June 30, 2004, of which approximately 36% were debt securities that subject
us to risk of loss of fair value with movements in market interest rates. If
interest rates were to increase by 10% from their levels at June 30, 2004, the
fair value of the fixed-rate debt securities would decrease by approximately $1
million. Any unrealized gains or losses are accounted for as a long-term
asset/liability as we will not benefit from any gains, and losses will be
recovered through the rate making process. For further discussion regarding the
recovery of decommissioning costs pursuant to the Texas electric restructuring
law, please read Note 4(a) to the CenterPoint Energy Notes, which is
incorporated herein by reference.
As discussed in Note 7 to the CenterPoint Energy Notes, which note is
incorporated herein by reference, upon adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), effective January
1, 2001, the ZENS obligation was bifurcated into a debt component and a
derivative component. The debt component of $106 million at June 30, 2004 is a
fixed-rate obligation and, therefore, does not expose us to the risk of loss in
earnings due to changes in market interest rates. However, the fair value of the
debt component would increase by approximately $16 million if interest rates
were to decline by 10% from levels at June 30, 2004. Changes in the fair value
of the derivative component will be recorded in our Statements of Consolidated
Income and, therefore, we are exposed to changes in the fair value of the
derivative component as a result of changes in the underlying risk-free interest
rate. If the risk-free interest rate were to increase by 10% from June 30, 2004
levels, the fair value of the derivative component would increase by
approximately $5 million, which would be recorded as a loss in our Statements of
Consolidated Income.
EQUITY MARKET VALUE RISK
We are exposed to equity market value risk through our ownership of 21.6
million shares of TW common stock, which we hold to facilitate our ability to
meet our obligations under the ZENS. Please read Note 7 to the CenterPoint
Energy Notes for a discussion of the effect of adoption of SFAS No. 133 on our
ZENS obligation and our historical accounting treatment of our ZENS obligation.
A decrease of 10% from the June 30, 2004 market value of Time Warner common
stock would result in a net loss of approximately $3 million, which would be
recorded as a loss in
43
our Statements of Consolidated Income.
As discussed above under "-- Interest Rate Risk," CenterPoint Houston
contributes to trusts established to fund Texas Genco's share of the
decommissioning costs for the South Texas Project, which held debt (36%) and
equity (64%) securities as of June 30, 2004. The equity securities expose us to
losses in fair value. If the market prices of the individual equity securities
were to decrease by 10% from their levels at June 30, 2004, the resulting loss
in fair value of these securities would be approximately $13 million. Currently,
the risk of an economic loss is mitigated as discussed above under "-- Interest
Rate Risk."
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of June 30, 2004 to provide assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
44
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of certain legal and regulatory proceedings affecting
CenterPoint Energy, please read Notes 5, 11 and 15 to our Interim Financial
Statements, "Business -- Regulation" and " -- Environmental Matters" in Item 1
of the CenterPoint Energy Form 10-K, "Legal Proceedings" in Item 3 of the
CenterPoint Energy Form 10-K and Notes 4 and 12 to the CenterPoint Energy Notes,
each of which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of our shareholders held on June 3, 2004, the
matters voted upon and the number of votes cast for, against or withheld, as
well as the number of abstentions and broker non-votes as to such matters
(including a separate tabulation with respect to each nominee for office), were
as stated below:
The following nominee for Class I Director was elected to serve a two-year
term expiring at the 2006 annual meeting of shareholders (there were no broker
non-votes):
Nominees For Withheld
---------------------- ------------- -------------
Robert T. O'Connell 261,149,161 8,930,606
The following nominees for Class II Directors were elected to serve
three-year terms expiring at the 2007 annual meeting of shareholders (there were
no broker non-votes):
Nominees For Withheld
---------------------- ------------- -------------
Milton Carroll 259,574,401 10,505,366
John T. Cater 259,446,218 10,633,549
Michael E. Shannon 260,031,607 10,048,160
Derrill Cody, O.Holcombe Crosswell, Thomas F. Madison and David M.
McClanahan all continue as directors of CenterPoint Energy.
The appointment of Deloitte & Touche LLP as independent accountants and
auditors for CenterPoint Energy for 2004 was ratified with 260,017,575 votes
for, 7,670,556 votes against, 2,391,626 abstentions and no broker non-votes.
The shareholder proposal regarding the use of performance and time-based
restricted share programs in lieu of indexing of stock options did not receive
the required affirmative vote of a majority of the shares of common stock
represented at the meeting. The proposal received 167,530,912 votes against,
36,930,522 votes for, 5,858,993 abstentions and 59,759,340 broker non-votes.
The shareholder proposal requesting the board to take steps to provide
that at future elections of directors, new directors be elected annually and not
by classes did not receive the required affirmative vote of a majority of the
shares of common stock represented at the meeting. The proposal received
85,813,701 votes against, 120,037,851 votes for, 4,468,876 abstentions and
59,759,339 broker non-votes.
45
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 of CenterPoint Energy, Inc. Pursuant to Item 601(b)(2) of
Regulation S-K, CenterPoint Energy has not filed the exhibits and schedules to
Exhibit 2.1. CenterPoint Energy hereby agrees to furnish a copy of any such
exhibit or schedule to the SEC upon request. Pursuant to Item 601(b)(4)(iii)(A)
of Regulation S-K, CenterPoint Energy has not filed as exhibits to this Form
10-Q certain long-term debt instruments, including indentures, under which the
total amount of securities authorized does not exceed 10% of the total assets of
CenterPoint Energy and its subsidiaries on a consolidated basis. CenterPoint
Energy hereby agrees to furnish a copy of any such instrument to the SEC upon
request.
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------ ----------- -------------------------------- ------ ---------
2.1 -- Transaction Agreement dated July 21, CenterPoint Energy's Current Report on Form 1-31447 10.1
2004 among CenterPoint Energy, Inc., 8-K dated July 21, 2004
Utility Holding, LLC, NN Houston Sub,
Inc., Texas Genco Holdings, Inc., HPC
Merger Sub, Inc. and GC Power
Acquisition LLC (excluding exhibits
and schedules thereto)
3.1.1 -- Amended and Restated Articles of CenterPoint Energy's Registration Statement on 3-69502 3.1
Incorporation of CenterPoint Energy Form S-4
3.1.2 -- Articles of Amendment to Amended and CenterPoint Energy's Form 10-K for the year 1-31447 3.1.1
Restated Articles of Incorporation of ended December 31, 2001
CenterPoint Energy
3.2 -- Amended and Restated Bylaws of CenterPoint Energy's Form 10-K for the year 1-31447 3.2
CenterPoint Energy ended December 31, 2001
3.3 -- Statement of Resolution Establishing CenterPoint Energy's Form 10-K for the year 1-31447 3.3
Series of Shares designated Series A ended December 31, 2001
Preferred Stock of CenterPoint Energy
4.1 -- Form of CenterPoint Energy Stock CenterPoint Energy's Registration Statement on 3-69502 4.1
Certificate Form S-4
4.2 -- Rights Agreement dated January 1, CenterPoint Energy's Form 10-K for the year 1-31447 4.2
2002, between CenterPoint Energy and ended December 31, 2001
JPMorgan Chase Bank, as Rights Agent
10.1.1 -- $1,310,000,000 Credit Agreement dated CenterPoint Energy's Form 10-K for the year 1-31447 4(g)(1)
as of November 12, 2002, among ended December 31, 2002
CenterPoint Houston and the banks
named therein
10.1.2 -- First Amendment to Exhibit 10.1.1, CenterPoint Energy's Form 10-Q for the quarter 1-31447 10.7
dated as of September 3, 2003 ended September 30, 2003
10.1.3 -- Pledge Agreement, dated as of CenterPoint Energy's Form 10-K for the year 1-31447 4(g)(2)
November 12, 2002 executed in ended December 31, 2002
connection with Exhibit 10.1.1
46
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------ ----------- -------------------------------- ------ ---------
10.2 -- $250,000,000 Credit Agreement, dated CenterPoint Energy's Form 8-K dated March 31, 1-31447 4.1
as of March 23, 2004, among CERC 2004
Corp., as Borrower, and the Initial
Lenders named therein, as Initial
Lenders
10.3.1 -- Credit Agreement, dated as of October CenterPoint Energy's Form 10-Q for the quarter 1-31447 10.8
7, 2003 among CenterPoint Energy and ended September 30, 2003
the banks named therein
10.3.2 -- Pledge Agreement, dated as of CenterPoint Energy's Form 10-Q for the quarter 1-31447 10.9
October 7, 2003, executed in ended September 30, 2003
connection with Exhibit 10.3.1
10.4.1 -- $75,000,000 revolving credit facility CenterPoint Energy's Form 10-K for the year 1-31447 10(pp)(1)
dated as of December 23, 2003 among ended December 31, 2003
Texas Genco, LP and the banks named
therein
+10.5 -- Long-term Incentive Plan of
CenterPoint Energy, Inc. (Amended and
Restated Effective as of May 1, 2004)
+10.6 -- First Amendment to the CenterPoint
Energy, Inc. Outside Director
Benefits Plan (As Amended and
Restated Effective June 18, 2003),
dated May 13, 2004 and effective as
of January 1, 2004
+10.7 -- Eighth Amendment to CenterPoint Energy,
Inc. Retirement Plan (As Amended and
Restated Effective January 1, 1999),
dated March 4, 2004, but effective as
of the dates specified therein
+31.1 -- Rule 13a-14(a)/15d-14(a)
Certification of David M. McClanahan
+31.2 -- Rule 13a-14(a)/15d-14(a)
Certification of Gary L. Whitlock
+32.1 -- Section 1350 Certification of David
M. McClanahan
+32.2 -- Section 1350 Certification of Gary L.
Whitlock
+99.1 -- Items incorporated by reference from
the CenterPoint Energy Form 10-K.
Item 1 "Business--Regulation,"
"--Environmental Matters," "--Risk
Factors," Item 3 "Legal Proceedings,"
Item 7 "Management's Discussion and
Analysis of Financial Condition and
Results of Operations--Certain Factors
Affecting Future Earnings" and Notes
2(d) (Long-Lived Assets and
Intangibles), 2(e) (Regulatory Assets
and Liabilities), 4 (Regulatory
Matters), 5 (Derivative Instruments),
7 (Indexed Debt Securities (ZENS) and
Time Warner Securities), 10(b)
(Pension and Postretirement Benefits)
and 12 (Commitments and
Contingencies)
47
(b) Reports on Form 8-K.
On April 1, 2004, we filed a Current Report on Form 8-K dated March 31,
2004 to report that CERC Corp. had entered into a new three-year, $250 million
credit agreement with a group of lenders.
On April 1, 2004, we filed a Current Report on Form 8-K dated April 1,
2004 to report that CenterPoint Houston, Texas Genco LP and Reliant Energy
Retail Services LLC filed the final true-up application required by the 1999
Texas Electric Choice Law with the Texas Utility Commission. A slide showing the
components of the true-up balance for CenterPoint Energy was furnished under
Item 9 of that form.
On April 1, 2004, we filed a Current Report on Form 8-K dated April 1,
2004 to furnish under Item 9 of that form a slide presentation we expect will be
presented to various members of the financial and investment community from time
to time.
On April 22, 2004, we filed a Current Report on Form 8-K dated April 22,
2004, in which we reported certain first quarter 2004 earnings information and
furnished a press release under Item 12 of that form.
On June 2, 2004, we filed a Current Report on Form 8-K dated May 28, 2004,
in which we reported that Texas Genco's Board of Directors had voted to exercise
its right of first refusal to purchase up to the entire 25.2 percent interest in
the South Texas Project Electric Generating Station that is currently owned by
American Electric Power.
On July 22, 2004, we filed a Current Report on Form 8-K dated July 21,
2004, in which we reported that we and Texas Genco had entered into a definitive
agreement for GC Power Acquisition LLC to acquire Texas Genco.
On August 6, 2004, we filed a Current Report on Form 8-K dated August 6,
2004, in which we reported certain second quarter 2004 earnings information and
furnished a press release under Item 12 of that form.
48
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, INC.
By: /s/ James S. Brian
------------------
James S. Brian
Senior Vice President and Chief Accounting Officer
Date: August 6, 2004
49
INDEX TO EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference to a
prior filing of CenterPoint Energy, Inc. Pursuant to Item 601(b)(2) of
Regulation S-K, CenterPoint Energy has not filed the exhibits and schedules to
Exhibit 2.1. CenterPoint Energy hereby agrees to furnish a copy of any such
exhibit or schedule to the SEC upon request. Pursuant to Item 601(b)(4)(iii)(A)
of Regulation S-K, CenterPoint Energy has not filed as exhibits to this Form
10-Q certain long-term debt instruments, including indentures, under which the
total amount of securities authorized does not exceed 10% of the total assets of
CenterPoint Energy and its subsidiaries on a consolidated basis. CenterPoint
Energy hereby agrees to furnish a copy of any such instrument to the SEC upon
request.
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------ ----------- -------------------------------- ------ ---------
2.1 -- Transaction Agreement dated July 21, CenterPoint Energy's Current Report on Form 1-31447 10.1
2004 among CenterPoint Energy, Inc., 8-K dated July 21, 2004
Utility Holding, LLC, NN Houston Sub,
Inc., Texas Genco Holdings, Inc., HPC
Merger Sub, Inc. and GC Power
Acquisition LLC (excluding exhibits
and schedules thereto)
3.1.1 -- Amended and Restated Articles of CenterPoint Energy's Registration Statement on 3-69502 3.1
Incorporation of CenterPoint Energy Form S-4
3.1.2 -- Articles of Amendment to Amended and CenterPoint Energy's Form 10-K for the year 1-31447 3.1.1
Restated Articles of Incorporation of ended December 31, 2001
CenterPoint Energy
3.2 -- Amended and Restated Bylaws of CenterPoint Energy's Form 10-K for the year 1-31447 3.2
CenterPoint Energy ended December 31, 2001
3.3 -- Statement of Resolution Establishing CenterPoint Energy's Form 10-K for the year 1-31447 3.3
Series of Shares designated Series A ended December 31, 2001
Preferred Stock of CenterPoint Energy
4.1 -- Form of CenterPoint Energy Stock CenterPoint Energy's Registration Statement on 3-69502 4.1
Certificate Form S-4
4.2 -- Rights Agreement dated January 1, CenterPoint Energy's Form 10-K for the year 1-31447 4.2
2002, between CenterPoint Energy and ended December 31, 2001
JPMorgan Chase Bank, as Rights Agent
10.1.1 -- $1,310,000,000 Credit Agreement dated CenterPoint Energy's Form 10-K for the year 1-31447 4(g)(1)
as of November 12, 2002, among ended December 31, 2002
CenterPoint Houston and the banks
named therein
10.1.2 -- First Amendment to Exhibit 10.1.1, CenterPoint Energy's Form 10-Q for the quarter 1-31447 10.7
dated as of September 3, 2003 ended September 30, 2003
10.1.3 -- Pledge Agreement, dated as of CenterPoint Energy's Form 10-K for the year 1-31447 4(g)(2)
November 12, 2002 executed in ended December 31, 2002
connection with Exhibit 10.1.1
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
- ------ ----------- -------------------------------- ------ ---------
10.2 -- $250,000,000 Credit Agreement, dated CenterPoint Energy's Form 8-K dated March 31, 1-31447 4.1
as of March 23, 2004, among CERC 2004
Corp., as Borrower, and the Initial
Lenders named therein, as Initial
Lenders
10.3.1 -- Credit Agreement, dated as of October CenterPoint Energy's Form 10-Q for the quarter 1-31447 10.8
7, 2003 among CenterPoint Energy and ended September 30, 2003
the banks named therein
10.3.2 -- Pledge Agreement, dated as of CenterPoint Energy's Form 10-Q for the quarter 1-31447 10.9
October 7, 2003, executed in ended September 30, 2003
connection with Exhibit 10.3.1
10.4.1 -- $75,000,000 revolving credit facility CenterPoint Energy's Form 10-K for the year 1-31447 10(pp)(1)
dated as of December 23, 2003 among ended December 31, 2003
Texas Genco, LP and the banks named
therein
+10.5 -- Long-term Incentive Plan of
CenterPoint Energy, Inc. (Amended and
Restated Effective as of May 1, 2004)
+10.6 -- First Amendment to the CenterPoint
Energy, Inc. Outside Director
Benefits Plan (As Amended and
Restated Effective June 18, 2003),
dated May 13, 2004 and effective as
of January 1, 2004
+10.7 -- Eighth Amendment to CenterPoint Energy,
Inc. Retirement Plan (As Amended and
Restated Effective January 1, 1999),
dated March 4, 2004, but effective as
of the dates specified therein
+31.1 -- Rule 13a-14(a)/15d-14(a)
Certification of David M. McClanahan
+31.2 -- Rule 13a-14(a)/15d-14(a)
Certification of Gary L. Whitlock
+32.1 -- Section 1350 Certification of David
M. McClanahan
+32.2 -- Section 1350 Certification of Gary L.
Whitlock
+99.1 -- Items incorporated by reference from
the CenterPoint Energy Form 10-K.
Item 1 "Business--Regulation,"
"--Environmental Matters," "--Risk
Factors," Item 3 "Legal Proceedings,"
Item 7 "Management's Discussion and
Analysis of Financial Condition and
Results of Operations--Certain Factors
Affecting Future Earnings" and Notes
2(d) (Long-Lived Assets and
Intangibles), 2(e) (Regulatory Assets
and Liabilities), 4 (Regulatory
Matters), 5 (Derivative Instruments),
7 (Indexed Debt Securities (ZENS) and
Time Warner Securities), 10(b)
(Pension and Postretirement Benefits)
and 12 (Commitments and
Contingencies)