UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _______________.
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Commission file number 1-3187
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Exact name of registrant as specified in its charter)
TEXAS 22-3865106
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 LOUISIANA (713) 207-1111
HOUSTON, TEXAS 77002 (Registrant's telephone number,
(Address and zip code of including area code)
principal executive offices)
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CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS
FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 1, 2006, all 1,000 common shares of CenterPoint Energy Houston
Electric, LLC were held by Utility Holding, LLC, a wholly owned subsidiary of
CenterPoint Energy, Inc.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................. 1
Condensed Statements of Consolidated Income
Three Months Ended March 31, 2005 and 2006
(unaudited)..................................... 1
Condensed Consolidated Balance Sheets
December 31, 2005 and March 31, 2006
(unaudited)..................................... 2
Condensed Statements of Consolidated Cash Flows
Three Months Ended March 31, 2005 and 2006
(unaudited)..................................... 4
Notes to Unaudited Condensed Consolidated
Financial Statements............................ 5
Item 2. Management's Narrative Analysis of the Results of
Operations......................................... 12
Item 4. Controls and Procedures............................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 19
Item 1A. Risk Factors.......................................... 19
Item 5. Other Information..................................... 19
Item 6. Exhibits.............................................. 19
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 amount of our recovery of the true-up components,
including, in particular, the results of appeals to the courts of
determinations on rulings obtained to date;
- state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation, 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;
- timely and appropriate rate actions and increases, allowing recovery
of costs and a reasonable return on investment;
- industrial, commercial and residential growth in our service territory
and changes in market demand and demographic patterns;
- changes in interest rates or rates of inflation;
- weather variations and other natural phenomena;
- commercial bank and financial market conditions, our access to
capital, the cost of such capital, and the results of our financing
and refinancing efforts, including availability of funds in the debt
capital markets;
- actions by rating agencies;
- non-payment for our services due to financial distress of our
customers, including Reliant Energy, Inc. (formerly named Reliant
Resources, Inc.) (RRI);
- the ability of RRI to satisfy its obligations to us, including
indemnity obligations;
- our ability to control costs;
- the investment performance of CenterPoint Energy, Inc.'s employee
benefit plans;
- our potential business strategies, including acquisitions or
dispositions of assets or businesses, which cannot be assured to be
completed or to have the anticipated benefits to us; and
- other factors we discuss in "Risk Factors" in Item 1A of Part I of our
Annual Report on Form 10-K for the year ended December 31, 2005, which
is incorporated herein by reference.
ii
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 HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(MILLIONS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2006
---- ----
REVENUES ............................... $345 $385
---- ----
EXPENSES:
Operation and maintenance ........... 139 135
Depreciation and amortization ....... 75 84
Taxes other than income taxes ....... 51 56
---- ----
Total ............................ 265 275
---- ----
OPERATING INCOME ....................... 80 110
---- ----
OTHER INCOME (EXPENSE):
Interest and other finance charges .. (76) (28)
Interest on transition bonds ........ (9) (33)
Return on true-up balance ........... 34 --
Other, net .......................... 11 15
---- ----
Total ............................ (40) (46)
---- ----
INCOME BEFORE INCOME TAXES ............. 40 64
Income tax expense .................. (12) (21)
---- ----
NET INCOME ............................. $ 28 $ 43
==== ====
See Notes to the Company's Interim Condensed Financial Statements
1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
(UNAUDITED)
ASSETS
DECEMBER 31, MARCH 31,
2005 2006
------------ ---------
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 40 $ 42
Accounts and notes receivable, net ............... 150 152
Accrued unbilled revenues ........................ 108 90
Materials and supplies ........................... 60 55
Deferred tax asset ............................... 1 --
Other ............................................ 34 41
------- -------
Total current assets .......................... 393 380
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment .................... 6,463 6,520
Less accumulated depreciation and amortization ... (2,386) (2,428)
------- -------
Property, plant and equipment, net ............ 4,077 4,092
------- -------
OTHER ASSETS:
Other intangibles, net ........................... 38 37
Regulatory assets ................................ 2,902 2,882
Notes receivable -- affiliated companies ......... 750 750
Other ............................................ 67 60
------- -------
Total other assets ............................ 3,757 3,729
------- -------
TOTAL ASSETS ............................... $ 8,227 $ 8,201
======= =======
See Notes to the Company's Interim Condensed Financial Statements
2
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(MILLIONS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND MEMBER'S EQUITY
DECEMBER 31, MARCH 31,
2005 2006
------------ ---------
CURRENT LIABILITIES:
Current portion of transition bond long-term debt ......... $ 73 $ 126
Accounts payable .......................................... 57 35
Accounts and notes payable -- affiliated companies, net ... 79 139
Taxes accrued ............................................. 139 53
Interest accrued .......................................... 50 47
Other ..................................................... 43 48
------ ------
Total current liabilities .............................. 441 448
------ ------
OTHER LIABILITIES:
Accumulated deferred income taxes, net .................... 1,400 1,391
Unamortized investment tax credits ........................ 42 40
Benefit obligations ....................................... 139 137
Regulatory liabilities .................................... 294 301
Notes payable -- affiliated companies ..................... 151 151
Other ..................................................... 44 46
------ ------
Total other liabilities ................................ 2,070 2,066
------ ------
LONG-TERM DEBT:
Transition bonds .......................................... 2,407 2,335
Other ..................................................... 1,591 1,591
------ ------
Total long-term debt ................................... 3,998 3,926
------ ------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
MEMBER'S EQUITY:
Common stock .............................................. -- --
Paid-in capital ........................................... 1,719 1,719
Retained earnings (deficit) ............................... (1) 42
------ ------
Total member's equity .................................. 1,718 1,761
------ ------
TOTAL LIABILITIES AND MEMBER'S EQUITY ............... $8,227 $8,201
====== ======
See Notes to the Company's Interim Condensed Financial Statements
3
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2006
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 28 $ 43
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ....................................... 75 84
Amortization of deferred financing costs ............................ 8 3
Deferred income taxes ............................................... 12 (11)
Investment tax credits .............................................. (2) (2)
Changes in other assets and liabilities:
Accounts and notes receivable, net ............................... 18 32
Accounts receivable/payable, affiliates .......................... (14) (20)
Inventory ........................................................ 2 5
Accounts payable ................................................. (14) (9)
Taxes receivable ................................................. (64) --
Interest and taxes accrued ....................................... (95) (28)
Net regulatory assets and liabilities ............................ (88) 3
Other current assets ............................................. 1 1
Other current liabilities ........................................ (2) 5
Other assets ..................................................... (7) (11)
Other liabilities ................................................ (2) 2
Other, net ....................................................... -- (1)
----- ----
Net cash provided by (used in) operating activities .............. (144) 96
----- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................... (55) (92)
Increase in restricted cash of transition bond companies ............... -- (7)
Other, net ............................................................. 1 4
----- ----
Net cash used in investing activities ............................ (54) (95)
----- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term revolving credit facility, net ............................... 55 --
Payments of long-term debt ............................................. (16) (18)
Increase in short-term notes with affiliates, net ...................... 146 80
Debt issuance costs .................................................... (2) --
Dividend to parent ..................................................... -- (61)
----- ----
Net cash provided by financing activities ........................... 183 1
----- ----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... (15) 2
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 25 40
----- ----
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 10 $ 42
===== ====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest, net of capitalized interest .................................. $ 109 $ 65
Income taxes ........................................................... 76 59
See Notes to the Company's Interim Condensed Financial Statements
4
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
General. Included in this Quarterly Report on Form 10-Q (Form 10-Q) of
CenterPoint Energy Houston Electric, LLC are the condensed consolidated interim
financial statements and notes (Interim Condensed Financial Statements) of
CenterPoint Energy Houston Electric, LLC and its subsidiaries (collectively,
CenterPoint Houston or the Company). The Interim Condensed Financial Statements
are unaudited, omit certain financial statement disclosures and should be read
with the Annual Report on Form 10-K of CenterPoint Houston for the year ended
December 31, 2005 (CenterPoint Houston Form 10-K).
Background. The Company engages in the electric transmission and
distribution business in a 5,000-square mile area of the Texas Gulf Coast that
includes Houston. The Company is an indirect wholly owned subsidiary of
CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company
created on August 31, 2002 as part of a corporate restructuring of Reliant
Energy, Incorporated (Reliant Energy) that implemented certain requirements of
the Texas Electric Choice Plan (Texas electric restructuring law).
CenterPoint Energy was a registered public utility holding company under
the Public Utility Holding Company Act of 1935, as amended (the 1935 Act). The
Energy Policy Act of 2005 (Energy Act) repealed the 1935 Act effective February
8, 2006. The Energy Act includes a new Public Utility Holding Company Act of
2005 (PUHCA 2005), which grants to the Federal Energy Regulatory Commission
(FERC) authority to require holding companies and their subsidiaries to maintain
certain books and records and make them available for review by the FERC and
state regulatory authorities in certain circumstances. On December 8, 2005, the
FERC issued rules implementing PUHCA 2005 that will require CenterPoint Energy
to notify the FERC of its status as a holding company and to maintain certain
books and records and make these available to the FERC. On April 24, 2006, the
FERC considered motions for rehearing of these rules and proposed to adopt
additional rules regarding maintenance of books and records by utility holding
companies.
Basis of Presentation. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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 Condensed Financial Statements reflect all normal
recurring adjustments that are, in the opinion of management, necessary to
present fairly the financial position, results of operations and cash flows for
the respective periods. Amounts reported in the Company's Condensed Statements
of Consolidated Income are not necessarily indicative of amounts expected for a
full-year period due to the effects of, among other things, (a) seasonal
fluctuations in demand for energy, (b) timing of maintenance and other
expenditures and (c) acquisitions and dispositions of businesses, assets and
other interests.
(2) REGULATORY MATTERS
(a) Recovery of True-Up Balance.
In March 2004, the Company filed its true-up application with the Public
Utility Commission of Texas (Texas Utility Commission), requesting recovery of
$3.7 billion, excluding interest, as allowed under the Texas electric
restructuring law. In December 2004, the Texas Utility Commission issued its
final order (True-Up Order) allowing
5
the Company to recover a true-up balance of approximately $2.3 billion, which
included interest through August 31, 2004, and providing for adjustment of the
amount to be recovered to include interest on the balance until recovery, the
principal portion of additional excess mitigation credits returned to customers
after August 31, 2004 and certain other matters. The Company and other parties
filed appeals of the True-Up Order to a district court in Travis County, Texas.
In August 2005, the court issued its final judgment on the various appeals. In
its judgment, the court affirmed most aspects of the True-Up Order, but reversed
two of the Texas Utility Commission's rulings. The judgment would have the
effect of restoring approximately $650 million, plus interest, of the $1.7
billion the Texas Utility Commission had disallowed from the Company's initial
request. The Company and other parties appealed the district court decisions.
Briefs have been filed with the 3rd Court of Appeals in Austin but oral argument
has not yet been scheduled. No amounts related to the district court's judgment
have been recorded in the consolidated financial statements.
Among the issues raised in the Company's appeal of the True-Up Order is the
Texas Utility Commission's reduction of the Company's stranded cost recovery by
approximately $146 million for the present value of certain deferred tax
benefits associated with its former electric generation assets. Such reduction
was considered in the Company's recording of an after-tax extraordinary loss of
$977 million in the last half of 2004. The Company believes that the Texas
Utility Commission based its order on proposed regulations issued by the
Internal Revenue Service (IRS) in March 2003 related to those tax benefits.
Those proposed regulations would have allowed utilities which were deregulated
before March 4, 2003 to make a retroactive election to pass the benefits of
Accumulated Deferred Investment Tax Credits (ADITC) and Excess Deferred Federal
Income Taxes (EDFIT) back to customers. However, in December 2005, the IRS
withdrew those proposed normalization regulations and issued new proposed
regulations that do not include the provision allowing a retroactive election to
pass the tax benefits back to customers. In a recent Private Letter Ruling
issued to a Texas utility on facts similar to the Company's, the IRS, without
referencing its proposed regulations, ruled that a normalization violation would
occur if ADITC and EDFIT were required to be returned to customers. Based on
that ruling and the proposed regulations, if the Texas Utility Commission's
order on this issue is not reversed on appeal or the amount of the tax benefits
is not otherwise restored by the Texas Utility Commission, the IRS is likely to
consider that a normalization violation has occurred. If so, the IRS could
require the Company to pay an amount equal to the Company's unamortized ADITC
balance as of the date that the normalization violation was deemed to have
occurred. In addition, if a normalization violation is deemed to have occurred,
the IRS could also deny the Company the ability to elect accelerated tax
depreciation benefits. If a normalization violation should ultimately be found
to exist, it could have an adverse impact on the Company's results of
operations, financial condition and cash flows. However, the Company is
vigorously pursuing the appeal of this issue and will seek other relief from the
Texas Utility Commission to avoid a normalization violation. The Texas Utility
Commission has not previously required a company subject to its jurisdiction to
take action that would result in a normalization violation.
There are two ways for the Company to recover the true-up balance: by
issuing transition bonds to securitize the amounts due and/or by implementing a
competition transition charge (CTC). Pursuant to a financing order issued by the
Texas Utility Commission in March 2005 and affirmed in all respects in August
2005 by the same Travis County District Court considering the appeal of the
True-Up Order, in December 2005, a subsidiary of the Company issued $1.85
billion in transition bonds with interest rates ranging from 4.84 percent to
5.30 percent and final maturity dates ranging from February 2011 to August 2020.
Through issuance of the transition bonds, the Company recovered approximately
$1.7 billion of the true-up balance determined in the True-Up Order plus
interest through the date on which the bonds were issued.
In July 2005, the Company received an order from the Texas Utility
Commission allowing it to implement a CTC which will collect approximately $596
million over 14 years plus interest at an annual rate of 11.075 percent (CTC
Order). The CTC Order authorizes the Company to impose a charge on retail
electric providers to recover the portion of the true-up balance not covered by
the financing order. The CTC Order also allows the Company to collect
approximately $24 million of rate case expenses over three years without a
return through a separate tariff rider (Rider RCE). The Company implemented the
CTC and Rider RCE effective September 13, 2005 and began recovering
approximately $620 million. Effective September 13, 2005, the return on the CTC
portion of the true-up balance is included in the Company's tariff-based
revenues. During the three months ended March 31, 2006, the Company recognized
approximately $17 million in CTC operating income. As of March 31, 2006, the
Company has not recorded an allowed equity return of $245 million on its true-up
balance because such return is being recognized as it is recovered in the
future.
Certain parties appealed the CTC Order to the 98th District Court in Travis
County. Oral argument to the district court was held in April 2006, and in early
May 2006, the district court issued an order reversing the CTC Order in three
respects. First, the court ruled that the Texas Utility Commission had
improperly relied on provisions of its rules dealing with the interest rate
applicable to CTC amounts. The district court reached that conclusion on the
ground that the Texas Supreme Court had previously invalidated that entire rule,
rejecting the position of the Company and the Texas Utility Commission that the
Texas Supreme Court had only invalidated the portion of the rule that had been
challenged in the previous case, not the provisions dealing with applicable
interest rates. If a rate lower than the 11.075 percent used by the Texas
Utility Commission were to be adopted, the costs that would be recoverable
through the CTC would be reduced. Secondly, the district court reversed the
Texas Utility Commission's ruling that allows the Company to recover through the
CTC the costs (approximately $5 million) of a panel appointed by the Texas
Utility Commission in connection with the valuation of CenterPoint Energy's
electric generation assets in the True-Up Proceeding. Finally, the district
court accepted the contention of one party that the CTC should not be allocated
to retail customers who have switched to new on-site generation. The Company and
CenterPoint Energy disagree with the district court's conclusions and plan to
seek further review of this decision from the Court of Appeals and, if required,
from the Texas Supreme Court. Pending completion of judicial review and any
action required by the Texas Utility Commission following a remand from the
courts, the CTC remains in effect. The ultimate outcome of this matter cannot be
predicted at this time. However, the Company's management does not expect the
disposition of this matter to have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
6
In January 2006, the Texas Utility Commission staff (Staff) proposed that
the Texas Utility Commission adopt new rules governing the carrying charges on
unrecovered true-up balances. If the Texas Utility Commission adopts the rule as
the Staff proposed it and the rule is deemed to apply to the Company, the rule
would reduce carrying costs on the unrecovered CTC balance prospectively from
11.075 percent to the utility's cost of debt.
(b) Final Fuel Reconciliation.
The results of the Texas Utility Commission's final decision related to the
Company's final fuel reconciliation are a component of the True-Up Order. The
Company has appealed certain portions of the True-Up Order involving a
disallowance of approximately $67 million relating to the final fuel
reconciliation in 2003 plus interest of $10 million. A judgment was entered by a
Travis County court in May 2005 affirming the Texas Utility Commission's
decision. The Company filed an appeal to the 3rd Court of Appeals in Austin in
June 2005. Oral arguments were held in April 2006, and a decision is expected by
the end of 2006.
(c) Remand of 2001 Unbundled Cost of Service (UCOS) Order.
The 3rd Court of Appeals in Austin remanded to the Texas Utility Commission
an issue that was decided by the Texas Utility Commission in the Company's 2001
unbundled cost of service proceeding. In its remand order, the court ruled that
the Texas Utility Commission had failed to adequately explain its basis for its
determination of certain projected transmission capital expenditures. The Court
of Appeals ordered the Texas Utility Commission to reconsider that determination
on the basis of the record that existed at the time of the Texas Utility
Commission's original order. In April 2006, the Texas Utility Commission opined
orally that the rate base should be reduced by $57 million and instructed its
Staff to quantify the effect on the Company's rates. In May 2006, the Staff
filed schedules that recalculated the results of the Company's UCOS rate case
after removing the $57 million. A comparison of this information to the
Commission's UCOS order suggests that the annual revenue reduction would likely
approximate $10 million. The Company continues to believe that the original
record before the Texas Utility Commission supports the rates set by the Texas
Utility Commission in its 2001 order. Depending on the Texas Utility
Commission's ultimate decision on this issue, the Company may ask the Texas
Utility Commission to reconsider its determination and, if that is unsuccessful,
may pursue further judicial review of this matter. The Company has also asked
the Texas Utility Commission to limit any reduction in rates in order to take
into consideration that an interim update to rate base would have been available
to the Company if the $57 million has been disallowed in the 2001 proceeding. No
prediction can be made at this time as to the ultimate outcome of this matter on
remand or the amount, if any, of any rate reduction or refund obligation. If the
Texas Utility Commission's indicated ruling on this issue ultimately is entered
and upheld on appeal, it could have a material adverse impact on the Company's
financial condition, results of operations or cash flows.
(d) Rate Case.
The Texas Utility Commission requires each electric utility to file an
annual Earnings Report providing certain information to enable the Texas Utility
Commission to monitor the electric utilities' earnings and financial condition
within the state. In May 2005, the Company filed its Earnings Report for the
calendar year ended December 31, 2004. The Company's Earnings Report shows that
it earned less than its authorized rate of return on equity in 2004.
In October 2005, the Staff filed a memorandum summarizing its review of the
Earnings Reports filed by electric utilities. Based on its review, the Staff
concluded that continuation of the Company's rates could result in excess retail
transmission and distribution revenues of as much as $105 million and excess
wholesale transmission revenues of as much as $31 million annually and
recommended that the Texas Utility Commission initiate a review of the
reasonableness of existing rates. The Staff's analysis was based on a 9.60
percent cost of equity, which is 165 basis points lower than the approved return
on equity from the Company's last rate proceeding, the elimination of interest
on debt that matured in November 2005 and certain other adjustments to the
Company's reported information. Additionally, a hypothetical capital structure
of 60 percent debt and 40 percent equity was used which varies materially from
the actual capital structure of the Company's regulated transmission and
distribution utility as of December 31, 2005 of approximately 50 percent debt
and 50 percent equity.
7
In December 2005, the Texas Utility Commission considered the Staff report
and agreed to initiate a rate proceeding concerning the reasonableness of the
Company's existing rates for transmission and distribution service and to
require the Company to make a filing by April 15, 2006 to justify or change
those rates.
In April 2006, the Company filed cost data and other information that
supports a rate increase of $50 million or 3.7 percent to the retail electric
providers that sell electricity to end-use customers in the Houston area. The
filing also supports a $43.1 million increase for the Company's wholesale
transmission customers, which include other utilities throughout the state.
The Company used a 2005 test year adjusted for updated cost data where
appropriate. The data reflects the $700 million that the Company has invested
during the last few years for new structures, power lines and related equipment
to continue to operate a reliable network as well as certain transmission
interconnect projects that are currently in the planning stages. It also
includes the increase in franchise fees that the Company is paying the City of
Houston under the recently adopted franchise ordinance which allows the company
to provide its electric delivery services within the city during the next thirty
years. In addition, recognizing the catastrophic damage to the facilities of
other electric utilities caused by hurricanes in 2004 and 2005, the Company is
proposing an increase to its storm reserve as well as an increase in
depreciation rates. Finally, the Company filed testimony supporting its 11.25%
return on equity and a 50% debt/50% equity capital structure.
A procedural schedule has been set and a final order is expected around
mid-October 2006.
(3) LONG-TERM DEBT
In March 2006, the Company replaced its $200 million five-year revolving
credit facility with a $300 million five-year revolving credit facility. The
facility has a first drawn cost of London Interbank Offered Rate (LIBOR) plus 45
basis points based on the Company's current credit ratings, as compared to LIBOR
plus 75 basis points for borrowings under the facility it replaced. The facility
contains covenants, including a debt, excluding transition bonds, to total
capitalization covenant of 65%.
Under the credit facility, an additional utilization fee of 10 basis points
applies to borrowings any time more than 50% of the facility is utilized, and
the spread to LIBOR fluctuates based on the Company's credit rating. Borrowings
under the facility are subject to customary terms and conditions. However, there
is no requirement that the Company make representations prior to borrowings as
to the absence of material adverse changes or litigation that could be expected
to have a material adverse effect. Borrowings under the credit facility are
subject to acceleration upon the occurrence of events of default that the
Company considers customary.
As of March 31, 2006, the Company had no borrowings and approximately $3
million of outstanding letters of credit under its $300 million credit facility.
The Company was in compliance with all covenants as of March 31, 2006.
The Company has $151 million of first mortgage bonds and $527 million of
general mortgage bonds that it has issued as collateral for long-term debt of
CenterPoint Energy. These bonds are not reflected in the consolidated financial
statements because of the contingent nature of the obligations.
(4) RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
Related Party Transactions. The following table summarizes receivables
from, or payables to, CenterPoint Energy or its subsidiaries:
DECEMBER 31, MARCH 31,
2005 2006
------------ ---------
(IN MILLIONS)
Accounts receivable from affiliates ....................... $ -- $ 34
Accounts payable to affiliates ............................ (11) (25)
Notes receivable/(payable) -- affiliated companies (1) .... (68) (148)
----- -----
Accounts and notes receivable/(payable) -- affiliated
companies, net ...................................... $ (79) $(139)
===== =====
Long-term notes receivable -- affiliated companies ........ $ 750 $ 750
===== =====
Long-term notes payable -- affiliated companies ........... $(151) $(151)
===== =====
- ----------
8
(1) The Company participates in a "money pool" through which it can borrow or
invest on a short-term basis. Funding needs are aggregated and external
borrowing or investing is based on the net cash position. The net funding
requirements of the money pool are expected to be met with borrowings under
CenterPoint Energy's revolving credit facility or the sale of commercial
paper.
For the three months ended March 31, 2005 and 2006, the Company had net
interest income related to affiliate borrowings of $9 million and $11 million,
respectively.
CenterPoint Energy provides some corporate services to the Company. The
costs of services have been charged directly to the Company using methods that
management believes are reasonable. These methods include negotiated usage
rates, dedicated asset assignment and proportionate corporate formulas based on
assets, operating expenses and employees. These charges are not necessarily
indicative of what would have been incurred had the Company not been an
affiliate. Amounts charged to the Company for these services were $26 million
and $30 million for the three months ended March 31, 2005 and 2006,
respectively, and are included primarily in operation and maintenance expenses.
Major Customers. During the three months ended March 31, 2005 and 2006,
revenues derived from energy delivery charges provided by the Company to
subsidiaries of Reliant Energy, Inc. (formerly Reliant Resources, Inc.) (RRI)
totaled $183 million and $162 million, respectively.
(5) COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
RRI Indemnified Litigation
The Company, CenterPoint Energy 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 CenterPoint Energy
and RRI, CenterPoint Energy and its subsidiaries, including the Company, 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 CenterPoint Energy 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
federal court in California, Nevada and Kansas and in state court 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. CenterPoint Energy's 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.
CenterPoint Energy, or its predecessor, Reliant Energy, has been named in
approximately 30 of these lawsuits, which were instituted between 2001 and 2005
and are pending in California state court in San Diego County, in Nevada state
court in Clark County and in federal district courts in San Francisco, San
Diego, Los Angeles, Fresno, Sacramento, San Jose, Kansas and Nevada and before
the Ninth Circuit Court of Appeals. However, the Company, CenterPoint Energy and
Reliant Energy were not participants in the electricity or natural gas markets
in California. CenterPoint Energy and Reliant Energy have been dismissed from
certain of the lawsuits,
9
either voluntarily by the plaintiffs or by order of the court, and CenterPoint
Energy believes it is not a proper defendant in the remaining cases and will
continue to seek dismissal from such remaining cases.
To date, several of the electricity complaints have been dismissed, and
several of the dismissals have been affirmed by appellate courts. Others have
been resolved by the settlement described in the following paragraph. Four of
the gas complaints have also been dismissed based on defendants' claims of
federal preemption and the filed rate doctrine, and these dismissals have been
appealed. In June 2005, a San Diego state court refused to dismiss other gas
complaints on the same basis. The other gas cases remain in the early procedural
stages.
On August 12, 2005, RRI reached a settlement with the FERC enforcement
staff, the states of California, Washington and Oregon, California's three
largest investor-owned utilities, classes of consumers from California and other
western states, and a number of California city and county government entities
that resolves their claims against RRI related to the operation of the
electricity markets in California and certain other western states in 2000-2001.
The settlement also resolves the claims of the states and the investor-owned
utilities related to the 2000-2001 natural gas markets. The settlement has been
approved by the FERC and by the California Public Utilities Commission, and now
must be approved by the courts in which the class action cases are pending. This
approval is expected in the second quarter of 2006. A party in the FERC
proceedings has filed a motion for rehearing of the FERC's order approving the
settlement, upon which the FERC has yet to rule. CenterPoint Energy is not a
party to the settlement, but may rely on the settlement as a defense to any
claims brought against it related to the time when CenterPoint Energy was an
affiliate of RRI. The terms of the settlement do not require payment by
CenterPoint Energy.
Other Class Action Lawsuits. 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 CenterPoint Energy. Two of the lawsuits
were dismissed without prejudice. In the remaining lawsuit, CenterPoint Energy
and certain current and former members of its benefits committee are defendants.
That lawsuit alleged that the defendants breached their fiduciary duties to
various employee benefits plans, directly or indirectly sponsored by CenterPoint
Energy, in violation of the Employee Retirement Income Security Act of 1974 by
permitting the plans to purchase or hold securities issued by CenterPoint 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 sought monetary damages for losses suffered on
behalf of the plans and a putative class of plan participants whose accounts
held CenterPoint Energy or RRI securities, as well as restitution. In January
2006, the federal district judge granted a motion for summary judgment filed by
CenterPoint Energy and the individual defendants. The plaintiffs have filed an
appeal of the ruling to the Fifth Circuit Court of Appeals. CenterPoint Energy
believes that this lawsuit is without merit and will continue to vigorously
defend the case. However, the ultimate outcome of this matter cannot be
predicted at this time.
ENVIRONMENTAL MATTERS
Asbestos. Facilities owned by CenterPoint Energy contain or have contained
asbestos insulation and other asbestos-containing materials. CenterPoint Energy
or its subsidiaries, including the Company, have been named, along with numerous
others, as a defendant in lawsuits filed by a large number of individuals who
claim injury due to exposure to asbestos. Most claimants in such litigation have
been workers who participated in construction of various industrial facilities,
including power plants. Some of the claimants have worked at locations owned by
CenterPoint Energy, but most existing claims relate to facilities previously
owned by CenterPoint Energy or its subsidiaries. CenterPoint Energy anticipates
that additional claims like those received may be asserted in the future. In
2004, CenterPoint Energy sold its generating business, to which most of these
claims relate, to Texas Genco LLC, which is now known as NRG Texas LP (NRG).
Under the terms of the arrangements regarding separation of the generating
business from CenterPoint Energy and its sale to Texas Genco LLC, ultimate
financial responsibility for uninsured losses from claims relating to the
generating business has been assumed by Texas Genco LLC and its successor, but
CenterPoint Energy has agreed to continue to defend such claims to the extent
they are covered by insurance maintained by CenterPoint Energy, subject to
reimbursement of the costs of such defense from the purchaser. Although their
ultimate outcome cannot be predicted at this time, CenterPoint Energy intends to
continue vigorously contesting claims that it does not consider to have merit
and does not expect, based on its experience to date, these matters, either
individually or in the aggregate, to have a material adverse effect on
CenterPoint Energy'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 potentially
responsible party in connection with sites found to require remediation due to
the presence of environmental contaminants. In addition, the Company has been
named from time to time as a defendant in litigation related to such sites.
Although the ultimate outcome of such matters cannot be predicted at this time,
the Company does not expect, based on its experience to date, these matters,
either individually or in the aggregate, to have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
10
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 does not expect the disposition of these matters to have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
NUCLEAR DECOMMISSIONING FUND COLLECTIONS
Pursuant to regulatory requirements and its tariff, the Company, as
collection agent, collects from its transmission and distribution customers the
nuclear decommissioning charge assessed with respect to the 30.8% ownership
interest in the South Texas Project which it owned when it was part of an
integrated electric utility. Amounts collected are transferred to nuclear
decommissioning trusts maintained by the current owner of that interest in the
South Texas Project. During 2003 and 2004, $2.9 million was transferred each
year and $3.2 million was transferred in 2005. There are various investment
restrictions imposed on owners of nuclear generating stations by the Texas
Utility Commission and the Nuclear Regulatory Commission relating to nuclear
decommissioning trusts. Pursuant to the provisions of both a separation
agreement and a final order of the Texas Utility Commission, relating to the
2005 transfer of ownership to Texas Genco LLC (now NRG), the Company and a
subsidiary of NRG are presently jointly administering the decommissioning funds
through the Nuclear Decommissioning Trust Investment Committee. NRG and the
Company 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. As administrators of the
decommissioning funds, the Company and NRG are jointly responsible for assuring
that the funds are prudently invested in a manner consistent with the rules of
the Texas Utility Commission. On February 2, 2006, the Company and a subsidiary
of Texas Genco filed a request with the Texas Utility Commission to name the
Texas Genco subsidiary as the sole fund administrator. That application is now
being pursued in the name of NRG and is currently pending before an
Administrative Law Judge. Pursuant to the Texas electric restructuring law,
costs associated with nuclear decommissioning that were not recovered as of
January 1, 2002, will continue to be subject to cost-of-service rate regulation
and will be charged to transmission and distribution customers of the Company or
its successor. The Company does not collect a nuclear decommissioning charge
with respect to the additional 13.2% ownership interest in the South Texas
Project that Texas Genco LLC acquired subsequent to its acquisition of
CenterPoint Energy's generation facilities.
TAX CONTINGENCIES
The Company has established reserves for certain tax items. The total
amount reserved for these tax items is approximately $12 million and $14
million as of December 31, 2005 and March 31, 2006, respectively.
(6) EMPLOYEE BENEFIT PLANS
The Company's employees participate in CenterPoint Energy's postretirement
benefit plan. The Company's net periodic cost includes the following components
relating to postretirement benefits:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2006
---- ----
(IN MILLIONS)
Interest cost........................... $ 4 $ 4
Expected return on plan assets.......... (3) (3)
Amortization of transition obligation... 2 2
--- ----
Net periodic cost.................... $ 3 $ 3
=== ====
The Company expects to contribute approximately $10 million to its
postretirement benefits plan in 2006, of which $2 million had been contributed
as of March 31, 2006.
11
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
The following narrative analysis should be read in combination with our
Interim Condensed Financial Statements contained in this Form 10-Q.
We meet the conditions specified in General Instruction H(1)(a) and (b) to
Form 10-Q and are therefore permitted to use the reduced disclosure format for
wholly owned subsidiaries of reporting companies. Accordingly, we have omitted
from this report the information called for by Item 2 (Management's Discussion
and Analysis of Financial Condition and Results of Operations), Item 3
(Quantitative and Qualitative Disclosures About Market Risk) of Part I and the
following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity
Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and
Item 4 (Submission of Matters to a Vote of Security Holders). The following
discussion explains material changes in our results of operations between the
three months ended March 31, 2005 and the three months ended March 31, 2006.
Reference is made to "Management's Narrative Analysis of Results of Operations"
in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2005
(CenterPoint Houston Form 10-K).
CONSOLIDATED RESULTS OF OPERATIONS
Our results of operations are affected by seasonal fluctuations in the
demand for electricity. Our results of operations are also affected by, among
other things, the actions of various governmental authorities having
jurisdiction over rates we charge, debt service costs, income tax expense, our
ability to collect receivables from retail electric providers and our ability to
recover our stranded costs and regulatory assets. For more information regarding
factors that may affect the future results of operations of our business, please
read "Risk Factors" in Item 1A of Part I of the CenterPoint Houston Form 10-K.
The following table sets forth our consolidated results of operations for
the three months ended March 31, 2005 and 2006, followed by a discussion of our
consolidated results of operations based on operating income. We have provided a
reconciliation of consolidated operating income to net income below.
THREE MONTHS
ENDED MARCH 31,
---------------
2005 2006
---- ----
(IN MILLIONS)
Revenues:
Electric transmission and distribution utility .. $323 $331
Transition bond companies ....................... 22 54
---- ----
Total revenues ............................... 345 385
---- ----
Expenses:
Operation and maintenance ....................... 138 134
Depreciation and amortization ................... 64 63
Taxes other than income taxes ................... 50 56
Transition bond companies ....................... 13 22
---- ----
Total expenses ............................... 265 275
---- ----
Operating income ................................... 80 110
Interest and other finance charges ................. (85) (61)
Return on true-up balance .......................... 34 --
Other income, net .................................. 11 15
---- ----
Income before income taxes ......................... 40 64
Income tax expense ................................. (12) (21)
---- ----
Net income ......................................... $ 28 $ 43
==== ====
12
THREE MONTHS ENDED
MARCH 31,
---------------------
2005 2006
--------- ---------
Throughput (in gigawatt-hours (GWh)):
Residential ......................... 4,142 3,986
Total ............................... 15,826 15,987
Average number of metered customers:
Residential ......................... 1,661,320 1,717,836
Total ............................... 1,887,020 1,950,829
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
We reported operating income of $110 million for the three months ended
March 31, 2006, consisting of $78 million for the regulated electric
transmission and distribution utility and $32 million for our transition bond
company subsidiaries that issued $749 million and $1.851 billion principal
amount of transition bonds in 2001 and the fourth quarter of 2005, respectively.
For the three months ended March 31, 2005, operating income totaled $80 million,
consisting of $71 million for the regulated electric transmission and
distribution utility and $9 million for the transition bond company. Operating
revenues for the regulated electric transmission and distribution utility
increased primarily due to continued customer growth ($8 million) with the
addition of nearly 67,000 metered customers since March 2005 and recovery of our
2004 true-up balance through the competition transition charge ($14 million),
partially offset by milder weather and decreased usage ($12 million). Operation
and maintenance expense decreased ($4 million) primarily due to a gain on the
sale of land ($14 million), which was partially offset by higher transmission
costs ($4 million) and severance costs associated with staff reductions in the
first quarter of 2006 ($4 million). Additionally, taxes other than income taxes
increased ($6 million) primarily due to higher franchise fees paid to the City
of Houston.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
For information on other developments, factors and trends that may have an
impact on our future earnings, please read "Risk Factors" in Item 1A of Part I
and "Management's Narrative Analysis of Results of Operations -- Certain Factors
Affecting Future Earnings" in Item 7 of Part II of the CenterPoint Houston Form
10-K.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital requirements are affected primarily by our
results of operations, capital expenditures, debt service requirements, working
capital needs, various regulatory actions and appeals relating to such
regulatory actions. Our principal cash requirements for the remainder of 2006
include approximately $244 million of capital expenditures and $54 million of
scheduled payments on transition bonds.
We expect that borrowings under our credit facility, anticipated cash flows
from operations and intercompany borrowings will be sufficient to meet our cash
needs for the next twelve months.
Off-Balance Sheet Arrangements. Other than operating leases and first
mortgage bonds and general mortgage bonds issued as collateral for long-term
debt of CenterPoint Energy, Inc. (CenterPoint Energy) as discussed below, we
have no off-balance sheet arrangements.
Credit Facilities. In March 2006, we replaced our $200 million five-year
revolving credit facility with a $300 million five-year revolving credit
facility. The facility has a first drawn cost of London Interbank Offered Rate
(LIBOR) plus 45 basis points based on our current credit ratings, as compared to
LIBOR plus 75 basis points for borrowings under the facility it replaced. The
facility contains covenants, including a debt, excluding transition bonds, to
total capitalization covenant of 65%.
Under the credit facility, an additional utilization fee of 10 basis points
applies to borrowings any time more than 50% of the facility is utilized, and
the spread to LIBOR fluctuates based on our credit rating. Borrowings under the
facility are subject to customary terms and conditions. However, there is no
requirement that we make representations prior to borrowings as to the absence
of material adverse changes or litigation that could be expected to have a
material adverse effect. Borrowings under the credit facility are subject to
acceleration upon the
13
occurrence of events of default that we consider customary. We are currently in
compliance with the various business and financial covenants contained in our
credit facility.
As of May 1, 2006, we had approximately $3 million of outstanding letters
of credit under the credit facility.
Money Pool. We participate in a "money pool" through which we and certain
of our affiliates can borrow or invest on a short-term basis. Funding needs are
aggregated and external borrowing or investing is based on the net cash
position. The net funding requirements of the money pool are expected to be met
with borrowings under CenterPoint Energy's revolving credit facility or the sale
of commercial paper. At May 1, 2006, we had borrowings of $123 million from the
money pool. The money pool may not provide sufficient funds to meet our cash
needs.
Long-term Debt. Our long-term debt consists of our obligations and the
obligations of our subsidiaries, including transition bonds issued by wholly
owned subsidiaries. The following table shows future maturity dates of long-term
debt issued by us to third parties and affiliates and scheduled future payment
dates of transition bonds issued by our subsidiaries, CenterPoint Energy
Transition Bond Company, LLC (Bond Company) and CenterPoint Energy Transition
Bond Company II, LLC (Bond Company II), as of May 1, 2006. Amounts are expressed
in millions.
TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
- ----- ----------- --------- --------- ---------- ------
2006 ... $ -- $ -- $ -- $ 54 $ 54
2007 ... -- -- -- 147 147
2008 ... -- -- -- 159 159
2009 ... -- -- -- 175 175
2010 ... -- -- -- 190 190
2011 ... -- -- -- 207 207
2012 ... 46 -- 46 227 273
2013 ... 450 -- 450 245 695
2014 ... 300 -- 300 147 447
2015 ... -- 151 151 158 309
2016 ... -- -- -- 169 169
2017 ... 127 -- 127 181 308
2018 ... -- -- -- 194 194
2019 ... -- -- -- 208 208
2021 ... 102 -- 102 -- 102
2023 ... 200 -- 200 -- 200
2027 ... 56 -- 56 -- 56
2033 ... 312 -- 312 -- 312
------ ---- ------ ------ ------
Total .. $1,593 $151 $1,744 $2,461 $4,205
====== ==== ====== ====== ======
As of May 1, 2006, outstanding first mortgage bonds and general mortgage
bonds aggregated approximately $2.3 billion as shown in the following table.
Amounts are expressed in millions.
ISSUED AS ISSUED AS COLLATERAL
ISSUED DIRECTLY COLLATERAL FOR THE FOR CENTERPOINT
TO THIRD PARTIES COMPANY'S DEBT ENERGY'S DEBT TOTAL
---------------- ------------------ -------------------- ------
First Mortgage Bonds..... $ 102 $ -- $151 $ 253
General Mortgage Bonds... 1,262 229 527 2,018
------ ---- ---- ------
Total .............. $1,364 $229 $678 $2,271
====== ==== ==== ======
The lien of the general mortgage indenture is junior to that of the
mortgage, pursuant to which the first mortgage bonds are issued. We may issue
additional general mortgage bonds on the basis of retired bonds, 70% of property
additions or cash deposited with the trustee. Approximately $2.0 billion of
additional first mortgage bonds and general mortgage bonds could be issued on
the basis of retired bonds and 70% of property additions as of March 31, 2006.
However, we are contractually prohibited, subject to certain exceptions, from
issuing additional first mortgage bonds.
The following table shows the maturity dates of the $678 million of first
mortgage bonds and general mortgage bonds that we have issued as collateral for
long-term debt of CenterPoint Energy. These bonds are not reflected in
14
our consolidated financial statements because of the contingent nature of the
obligations. Amounts are expressed in millions.
FIRST GENERAL
YEAR MORTGAGE BONDS MORTGAGE BONDS TOTAL
---- -------------- -------------- -----
2011 ......... $ -- $ 19 $ 19
2015 ......... 151 -- 151
2018 ......... -- 50 50
2019 ......... -- 200 200
2020 ......... -- 90 90
2026 ......... -- 100 100
2028 ......... -- 68 68
---- ---- ----
Total ..... $151 $527 $678
==== ==== ====
At May 1, 2006, Bond Company had $611 million aggregate principal amount of
outstanding transition bonds that were issued in 2001 in accordance with the
1999 Texas Electric Choice Plan (Texas electric restructuring law). At May 1,
2006, Bond Company II had $1.85 billion aggregate principal amount of
outstanding transition bonds that were issued in 2005 in accordance with the
Texas electric restructuring law. The transition bonds are secured by
"transition property," as defined in the Texas electric restructuring law, which
includes the irrevocable right to recover, through non-bypassable transition
charges payable by retail electric customers, qualified costs provided in the
Texas electric restructuring law. The transition bonds are reported as our
long-term debt, although the holders of the transition bonds have no recourse to
any of our assets or revenues, and our creditors have no recourse to any assets
or revenues (including, without limitation, the transition charges) of the bond
companies. We have no payment obligations with respect to the transition bonds
except to remit collections of transition charges as set forth in a servicing
agreement between us and the bond companies and in an intercreditor agreement
among us, the bond companies and other parties.
Impact on Liquidity of a Downgrade in Credit Ratings. As of May 1, 2006,
Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies (S&P), and Fitch, Inc. (Fitch) had
assigned the following credit ratings to our senior debt.
MOODY'S S&P FITCH
------------------- ------------------- -------------------
INSTRUMENT RATING OUTLOOK(1) RATING OUTLOOK(2) RATING OUTLOOK(3)
---------- ------ ---------- ------ ---------- ------ ----------
Senior Secured Debt (First Mortgage
Bonds)............................. Baa2 Stable BBB Stable A- Stable
- ----------
(1) 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 "stable" outlook from Fitch encompasses a one-to-two year horizon as to
the likely ratings direction.
We cannot assure you that these ratings will remain in effect for any given
period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our commercial strategies.
A decline in credit ratings could increase borrowing costs under our $300
million 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 could
negatively impact our ability to complete capital market transactions.
Cross Defaults. Under CenterPoint Energy's revolving credit facility, a
payment default on, or a non-payment default that permits acceleration of, any
indebtedness exceeding $50 million by us will cause a default. Pursuant to
15
the indenture governing CenterPoint Energy's senior notes, a payment default by
us, in respect of, or an acceleration of, borrowed money and certain other
specified types of obligations, in the aggregate principal amount of $50 million
will cause a default. As of May 1, 2006, CenterPoint Energy had issued six
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
debt instruments or bank credit facilities.
Other Factors that Could Affect Cash Requirements. In addition to the above
factors, our liquidity and capital resources could be affected by:
- increases in interest expense in connection with debt refinancings and
borrowings under our credit facility;
- various regulatory actions;
- the ability of RRI and its subsidiaries to satisfy their obligations
as our principal customers and in respect of RRI's indemnity
obligations to us;
- restoration costs and revenue losses resulting from natural disasters
such as hurricanes; and
- various other risks identified in "Risk Factors" in Item 1A of Part I
of the CenterPoint Houston Form 10-K.
Certain Contractual Limits on Ability to Issue Securities and Pay
Dividends. Our credit facility limits our debt, excluding transition bonds, as a
percentage of our total capitalization to 65 percent. Additionally, in
connection with the issuance of a certain series of general mortgage bonds, we
agreed not to issue, subject to certain exceptions, additional first mortgage
bonds.
Our parent, CenterPoint Energy, was a registered public utility holding
company under the Public Utility Holding Company Act of 1935, as amended (the
1935 Act). The Energy Policy Act of 2005 (Energy Act) repealed the 1935 Act
effective February 8, 2006. The Energy Act includes a new Public Utility Holding
Company Act of 2005 (PUHCA 2005), which grants to the Federal Energy Regulatory
Commission (FERC) authority to require holding companies and their subsidiaries
to maintain certain books and records and make them available for review by the
FERC and state regulatory authorities in certain circumstances. On December 8,
2005, the FERC issued rules implementing PUHCA 2005 that will require
CenterPoint Energy to notify the FERC of its status as a holding company and to
maintain certain books and records and make these available to the FERC. On
April 24, 2006, the FERC considered motions for rehearing of these rules and
proposed to adopt additional rules regarding maintenance of books and records by
utility holding companies.
Relationship with CenterPoint Energy. We are an indirect wholly owned
subsidiary of CenterPoint Energy. As a result of this relationship, the
financial condition and liquidity of our parent company could affect our access
to capital, our credit standing and our financial condition.
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
consolidated financial statements in the CenterPoint Houston Form 10-K. We
believe the following accounting policies involve the application of critical
accounting estimates. Accordingly, these accounting
16
estimates have been reviewed and discussed with the audit committee of the board
of directors of CenterPoint Energy.
ACCOUNTING FOR RATE REGULATION
Statement of Financial Accounting Standards (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. We continue to apply SFAS No. 71
which results in our accounting for the 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 relate to $328 million of recoverable electric generation-related
regulatory assets as of March 31, 2006. These costs are recoverable under the
provisions of the Texas electric restructuring law. Based on our analysis of the
final order issued by the Public Utility Commission of Texas (Texas Utility
Commission), we recorded an after-tax charge to earnings in 2004 of
approximately $977 million to write-down our electric generation-related
regulatory assets to their realizable value, which is reflected as an
extraordinary loss in the Condensed Statements of Consolidated Income. Based on
subsequent orders received from the Texas Utility Commission, we recorded an
extraordinary gain of $30 million after-tax in the second quarter of 2005
related to the regulatory asset. Additionally, a district court in Travis
County, Texas issued a judgment that would have the effect of restoring
approximately $650 million, plus interest, of disallowed costs. Appeals of the
district court's judgment are still pending. No amounts related to the district
court's judgment have been recorded in our consolidated financial statements.
For additional information relating to regulatory proceedings, see Note 2 to our
Interim Condensed Financial Statements.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We review the carrying value of our long-lived assets, including
identifiable intangibles, whenever events or changes in circumstances indicate
that such carrying values may not be recoverable. 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.
ASSET RETIREMENT OBLIGATIONS
We account for our long-lived assets under SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS No. 143), and Financial Accounting Standards
Board Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations - An Interpretation of SFAS No. 143" (FIN 47). SFAS No. 143 and FIN
47 require that an asset retirement obligation be recorded at fair value in the
period in which it is incurred if a reasonable estimate of fair value can be
made. In the same period, the associated asset retirement costs are capitalized
as part of the carrying amount of the related long-lived asset. Rate-regulated
entities may recognize regulatory assets or liabilities as a result of timing
differences between the recognition of costs as recorded in accordance with SFAS
No. 143 and FIN 47, and costs recovered through the ratemaking process.
We estimate the fair value of asset retirement obligations by calculating
the discounted cash flows that are dependent upon the following components:
- Inflation adjustment - The estimated cash flows are adjusted for
inflation estimates for labor, equipment,
17
materials, and other disposal costs;
- Discount rate - The estimated cash flows include contingency factors
that were used as a proxy for the market risk premium; and
- Third party markup adjustments - Internal labor costs included in the
cash flow calculation were adjusted for costs that a third party would
incur in performing the tasks necessary to retire the asset.
Changes in these factors could materially affect the obligation recorded to
reflect the ultimate cost associated with retiring the assets under SFAS No. 143
and FIN 47. For example, if the inflation adjustment increased 25 basis points,
this would increase the balance for asset retirement obligations by
approximately 2%. Similarly, an increase in the discount rate by 25 basis points
would decrease asset retirement obligations by approximately the same
percentage. At March 31, 2006, our estimated cost of retiring these assets is
approximately $12 million.
UNBILLED ENERGY REVENUES
Revenues related to the delivery of electricity are generally recorded when
electricity is delivered to customers. However, the determination of electricity
deliveries 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 electricity delivered to customers since the date of the
last meter reading are estimated and the corresponding unbilled revenue is
estimated. Unbilled electricity delivery revenue is estimated each month based
on daily supply volumes, applicable rates and analyses reflecting significant
historical trends and experience. 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.
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 March 31, 2006 to provide assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms
and such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding disclosure.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended March 31, 2006 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of material legal and regulatory proceedings affecting us,
please read Notes 2 and 5 to our Interim Condensed Financial Statements, each of
which is incorporated herein by reference. See also "Business - Regulation" and
"- Environmental Matters" in Item 1 and "Legal Proceedings" in Item 3 of the
CenterPoint Houston Form 10-K.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in the
CenterPoint Houston Form 10-K.
ITEM 5. OTHER INFORMATION
Our ratio of earnings to fixed charges for the three months ended March 31,
2005 and 2006 was 1.46 and 2.02, respectively. We do not believe that the ratios
for these three month periods are necessarily indicators of the ratios for the
twelve month period due to the seasonal nature of our business. The ratios were
calculated pursuant to applicable rules of the Securities and Exchange
Commission.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated by reference to a
prior filing of CenterPoint Houston or CenterPoint Energy as indicated.
Report or
Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ----------------------- -------------------- ------------------- -------------------
3.1 Articles of CenterPoint 1-3187 3(b)
Organization of Houston's Form 8-K
CenterPoint Energy dated August 31,
Houston Electric 2002 filed with
the SEC on
September 3, 2002
3.2 Limited Liability CenterPoint 1-3187 3(c)
Company Regulations Houston's Form 8-K
of CenterPoint dated August 31,
Energy Houston 2002 filed with
Electric the SEC on
September 3, 2002
4.1 $300,000,000 Credit CenterPoint Houston's 1-3187 4.2
Agreement dated as of Form 8-K dated March
March 31, 2006, among 31, 2006
CenterPoint Houston,
as Borrower, and the
Initial Lenders named
therein, as Initial
Lenders
19
Report or
Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ----------------------- -------------------- ------------------- -------------------
+12 Computation of
Ratios of Earnings
to Fixed Charges
+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 Houston
Form 10-K. Item 1A
"--Risk Factors."
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
By: /s/ James S. Brian
------------------------------------
James S. Brian
Senior Vice President and Chief
Accounting Officer
Date: May 12, 2006
21
Exhibit Index
Report or
Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ----------------------- -------------------- ------------------- -------------------
3.1 Articles of CenterPoint 1-3187 3(b)
Organization of Houston's Form 8-K
CenterPoint Energy dated August 31,
Houston Electric 2002 filed with
the SEC on
September 3, 2002
3.2 Limited Liability CenterPoint 1-3187 3(c)
Company Regulations Houston's Form 8-K
of CenterPoint dated August 31,
Energy Houston 2002 filed with
Electric the SEC on
September 3, 2002
4.1 $300,000,000 Credit CenterPoint Houston's 1-3187 4.2
Agreement dated as of Form 8-K dated March
March 31, 2006, among 31, 2006
CenterPoint Houston,
as Borrower, and the
Initial Lenders named
therein, as Initial
Lenders
Report or
Registration SEC File or
Exhibit Number Description Statement Registration Number Exhibit References
- -------------- ----------------------- -------------------- ------------------- -------------------
+12 Computation of
Ratios of Earnings
to Fixed Charges
+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 Houston
Form 10-K. Item 1A
"--Risk Factors."