EXHIBIT 99.2
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF THE COMPANY
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
REVENUES................................................. $2,160,641 $2,099,872 $2,221,618
---------- ---------- ----------
EXPENSES:
Purchased power........................................ -- -- 66,348
Operation and maintenance.............................. 585,767 649,995 575,241
Depreciation and amortization.......................... 356,523 299,204 270,799
Taxes other than income taxes.......................... 283,802 287,318 212,988
---------- ---------- ----------
Total............................................... 1,226,092 1,236,517 1,125,376
---------- ---------- ----------
OPERATING INCOME......................................... 934,549 863,355 1,096,242
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense and distribution on trust preferred
securities.......................................... (230,385) (233,344) (284,898)
Other, net............................................. 20,190 43,755 21,988
---------- ---------- ----------
Total............................................... (210,195) (189,589) (262,910)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND PREFERRED DIVIDENDS.......................... 724,354 673,766 833,332
Income Tax Expense..................................... 233,367 227,811 285,882
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
PREFERRED DIVIDENDS.................................... 490,987 445,955 547,450
Income (Loss) from Discontinued Operations, net of
tax................................................. (43,487) 534,604 131,949
---------- ---------- ----------
INCOME BEFORE PREFERRED DIVIDENDS........................ 447,500 980,559 679,399
PREFERRED DIVIDENDS...................................... 389 858 --
---------- ---------- ----------
NET INCOME............................................... $ 447,111 $ 979,701 $ 679,399
========== ========== ==========
</Table>
See Notes to the Company's Consolidated Financial Statements
1
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2000 2001 2002
-------- -------- --------
(IN THOUSANDS)
Net income.................................................. $447,111 $979,701 $679,399
-------- -------- --------
Other comprehensive income (loss), net of tax:
Additional minimum non-qualified pension liability
adjustment (net of tax of $1,361 in 2000, $346 in 2001
and $1,015 in 2002).................................... (2,527) 642 1,885
Comprehensive income (loss) from discontinued operations,
(net of tax of $39,383 in 2000, $97,709 in 2001 and
$108,844 in 2002)...................................... 73,139 (181,459) 202,138
-------- -------- --------
Other comprehensive income (loss)........................... 70,612 (180,817) 204,023
-------- -------- --------
Comprehensive income........................................ $517,723 $798,884 $883,422
======== ======== ========
</Table>
See Notes to the Company's Consolidated Financial Statements
2
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
------------------------
2001 2002
----------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,428 $ 70,866
Accounts and notes receivable, net........................ 12,463 99,304
Unbilled revenue.......................................... 33,404 70,385
Materials and supplies.................................... 80,919 59,941
Current assets of discontinued operations................. 6,366,569 --
Other..................................................... 4,071 11,839
----------- ----------
Total current assets................................... 6,500,854 312,335
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 4,065,140 3,837,232
----------- ----------
OTHER ASSETS:
Other intangibles, net.................................... 38,171 39,912
Regulatory assets......................................... 3,247,888 3,970,007
Notes receivable -- affiliated companies.................. -- 814,513
Non-current assets of discontinued operations............. 16,910,295 --
Other..................................................... 181,589 66,049
----------- ----------
Total other assets..................................... 20,377,943 4,890,481
----------- ----------
TOTAL ASSETS........................................... $30,943,937 $9,040,048
=========== ==========
LIABILITIES, STOCKHOLDER'S AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Short-term borrowings..................................... $ 163,731 $ --
Current portion of long-term debt......................... 414,038 18,758
Accounts payable.......................................... 40,089 32,362
Accounts payable -- affiliated companies, net............. 40,192 43,662
Notes payable -- affiliated companies, net................ 225,998 214,976
Taxes accrued............................................. 113,694 44,208
Interest accrued.......................................... 49,718 78,355
Regulatory liabilities.................................... 154,783 168,173
Current liabilities of discontinued operations............ 8,789,005 --
Other..................................................... 124,458 57,513
----------- ----------
Total current liabilities.............................. 10,115,706 658,007
----------- ----------
OTHER LIABILITIES:
Accumulated deferred income taxes, net.................... 1,055,966 1,419,301
Unamortized investment tax credits........................ 58,270 53,581
Benefit obligations....................................... 81,555 61,671
Regulatory liabilities.................................... 1,150,824 940,615
Notes payable -- affiliated companies..................... 10,825 916,400
Non-current liabilities of discontinued operations........ 8,407,310 --
Other..................................................... 36,365 25,206
----------- ----------
Total other liabilities................................ 10,801,115 3,416,774
----------- ----------
LONG-TERM DEBT.............................................. 2,947,193 2,641,281
----------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR
SUBORDINATED DEBENTURES OF THE COMPANY.................... 342,000 --
----------- ----------
STOCKHOLDER'S AND MEMBER'S EQUITY........................... 6,737,923 2,323,986
----------- ----------
TOTAL LIABILITIES, STOCKHOLDER'S AND MEMBER'S EQUITY... $30,943,937 $9,040,048
=========== ==========
</Table>
See Notes to the Company's Consolidated Financial Statements
3
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
--------- ---------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 447,111 $ 979,701 $ 679,399
Less: Income (loss) from discontinued operations...... (43,487) 534,604 131,949
--------- ---------- -----------
Income from continuing operations, less preferred
dividends.......................................... 490,598 445,097 547,450
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 356,523 299,204 270,799
Deferred income taxes.............................. 68,113 (127,442) 352,421
Investment tax credit.............................. (4,712) (4,712) (4,689)
Changes in other assets and liabilities:
Accounts and notes receivable, net............... 51,964 779 (275,089)
Accounts receivable/payable, affiliates.......... (9,374) 56,215 3,469
Inventory........................................ (46,552) 22,982 20,978
Accounts payable................................. (52,681) 52,570 (7,727)
Fuel cost recovery............................... (515,278) 357,139 216,368
Interest and taxes accrued....................... (50,034) 104,310 (40,849)
Net regulatory assets and liabilities............ (73,399) 4,967 (1,022,145)
Other current assets............................. 1,882 724 (7,767)
Other current liabilities........................ 63,390 (70,224) (66,946)
Other assets..................................... 1,289 (81,850) 104,519
Other liabilities................................ 36,515 35,873 (18,244)
Other, net......................................... 4,706 -- --
--------- ---------- -----------
Net cash provided by operating activities..... 322,950 1,095,632 72,548
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................. (383,706) (525,729) (344,750)
--------- ---------- -----------
Net cash used in investing activities......... (383,706) (525,729) (344,750)
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash related to securitization
financing.......................................... -- -- 3,715
Proceeds from issuance of long-term debt.............. -- 748,572 1,310,000
Increase (decrease) in short-term borrowings, net..... 266,334 (105,665) (163,731)
Increase (decrease) in short-term notes with
affiliates, net.................................... 25,314 215,220 (223,310)
Payments of long-term debt............................ (150,008) (226,547) (313,414)
Decrease in long-term notes payable with affiliates... -- -- (550,000)
Debt issuance costs................................... -- (10,375) (59,574)
Payment of common stock dividends..................... (426,859) (433,918) (222,538)
Redemption of preferred stock......................... -- (10,227) --
Other, net............................................ (504) 114,479 --
--------- ---------- -----------
Net cash provided by (used in) financing
activities.................................. (285,723) 291,539 (218,852)
--------- ---------- -----------
NET CASH PROVIDED BY (USED IN) DISCONTINUED
OPERATIONS............................................ 336,739 (859,095) 558,492
--------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (9,740) 2,347 67,438
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR...... 10,821 1,081 3,428
--------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR............ $ 1,081 $ 3,428 $ 70,866
========= ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest........................................... $ 227,771 $ 218,887 $ 194,948
Income taxes....................................... 303,171 375,297 48,398
</Table>
See Notes to the Company's Consolidated Financial Statements
4
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED STOCKHOLDER'S AND MEMBER'S EQUITY
<Table>
<Caption>
2000 2001 2002
-------------------- -------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------- -------- -----------
(THOUSANDS OF DOLLARS AND SHARES)
PREFERENCE STOCK, NONE
OUTSTANDING....................... -- $ -- -- $ -- -- $ --
CUMULATIVE PREFERRED STOCK, $0.01
PAR VALUE; AUTHORIZED 20,000,000
SHARES
Balance, beginning of year........ 97 9,740 97 9,740 -- --
Redemption of preferred stock..... -- -- (97) (9,740) -- --
------- ---------- ------- ---------- -------- -----------
Balance, end of year.............. 97 9,740 -- -- -- --
------- ---------- ------- ---------- -------- -----------
COMMON STOCK, $0.01 PAR VALUE;
AUTHORIZED 1,000,000,000 SHARES
Balance, beginning of year........ 297,612 2,976 299,914 2,999 302,944 3,029
Issuances related to benefit and
investment plans................ 2,302 23 3,030 30 -- --
Restructuring..................... -- -- -- -- (302,943) (3,028)
------- ---------- ------- ---------- -------- -----------
Balance, end of year.............. 299,914 2,999 302,944 3,029 1 1
------- ---------- ------- ---------- -------- -----------
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of year........ -- 3,179,775 -- 3,254,191 -- 3,894,272
Issuances related to benefit and
investment plans................ -- 74,424 -- 130,630 -- --
Unrealized gain on sale of
subsidiaries' stock............. -- -- -- 509,499 -- --
Other............................. -- (8) -- (48) -- --
Restructuring..................... -- -- -- -- -- (1,689,233)
------- ---------- ------- ---------- -------- -----------
Balance, end of year.............. -- 3,254,191 -- 3,894,272 -- 2,205,039
------- ---------- ------- ---------- -------- -----------
TREASURY STOCK
Balance, beginning of year........ (3,625) (93,296) (4,811) (120,856) -- --
Shares acquired................... (1,184) (27,306) -- -- -- --
Contribution to pension plan...... -- -- 4,512 113,336 -- --
Other............................. (2) (254) 299 7,520 -- --
------- ---------- ------- ---------- -------- -----------
Balance, end of year.............. (4,811) (120,856) -- -- -- --
------- ---------- ------- ---------- -------- -----------
UNEARNED ESOP STOCK
Balance, beginning of year........ (10,679) (199,226) (8,639) (161,158) (7,070) (131,888)
Issuances related to benefit
plan............................ 2,040 38,068 1,569 29,270 -- --
Restructuring..................... -- -- -- -- 7,070 131,888
------- ---------- ------- ---------- -------- -----------
Balance, end of year.............. (8,639) (161,158) (7,070) (131,888) -- --
------- ---------- ------- ---------- -------- -----------
RETAINED EARNINGS
Balance, beginning of year........ 2,500,181 2,520,350 3,176,533
Net income........................ 447,111 979,701 679,399
Common stock dividends -- $1.50
per share in 2000, $1.125 per
Share in 2001 and $0.91 per
share in 2002................... (426,942) (323,518) (271,292)
Restructuring..................... -- -- (3,465,694)
---------- ---------- -----------
Balance, end of year.............. 2,520,350 3,176,533 118,946
---------- ---------- -----------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year........ (93,818) (23,206) (204,023)
---------- ---------- -----------
Other comprehensive income, net of
tax:
Additional minimum pension
liability adjustment.......... (2,527) 642 1,885
Other comprehensive income
(loss) from discontinued
operations.................... 73,139 (181,459) 202,138
---------- ---------- -----------
Other comprehensive income
(loss).......................... 70,612 (180,817) 204,023
---------- ---------- -----------
Balance, end of year.............. (23,206) (204,023) --
---------- ---------- -----------
Total Stockholder's and
Member's Equity............ $5,482,060 $6,737,923 $ 2,323,986
========== ========== ===========
</Table>
See Notes to the Company's Consolidated Financial Statements
5
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
ORGANIZATIONAL STRUCTURE AND RESTRUCTURING
CenterPoint Energy Houston Electric, LLC (CenterPoint Houston or the
Company) is a regulated utility engaged in the transmission and distribution of
electric energy in a 5,000 square mile area located along the Texas Gulf Coast,
including the City of Houston. CenterPoint Houston is an indirect wholly owned
subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a new public
utility holding company.
The Company's business includes:
- Distribution. The Company's electric distribution business distributes
electricity for retail electric providers in its certificated service
area by carrying power from the substation to the retail electric
customer.
- Transmission. The Company's transmission business transports electricity
from power plants to substations and from one substation to another in
locations in the control area managed by the Electric Reliability Council
of Texas, Inc. (ERCOT).
The Company's business also includes the stranded costs and regulatory
asset recovery associated with the Company's historical generating operations.
The Company operates its business as a single segment. In addition to the
electric transmission and distribution business, the consolidated financial
statements include the operations of one financing subsidiary.
The Company's business does not include:
- the generation or sale of electricity;
- the procurement, supply or delivery of fuel for the generation of
electricity; or
- the marketing to or billing of retail electric customers.
Effective August 31, 2002, Reliant Energy, Incorporated (Reliant Energy)
consummated a restructuring transaction (Restructuring) in which it, among other
things, (1) conveyed its Texas electric generation assets to Texas Genco
Holdings, Inc. (Texas Genco), (2) became an indirect, wholly owned subsidiary of
a new utility holding company, CenterPoint Energy, (3) was converted into a
Texas limited liability company named CenterPoint Energy Houston Electric, LLC
and (4) distributed the capital stock of its operating subsidiaries, including
Texas Genco, to CenterPoint Energy. As part of the Restructuring, each share of
Reliant Energy common stock was converted into one share of CenterPoint Energy
common stock. The Company's operating subsidiaries which were distributed in
connection with the Restructuring and presented as discontinued operations
included $2.1 billion of indebtedness. An additional $1.9 billion of
indebtedness was assumed by CenterPoint Energy at the time of the Restructuring,
consisting of $1.6 billion of debt and $0.3 billion of trust preferred
securities that were reflected in continuing operations in the Company's
Consolidated Balance Sheet as of December 31, 2001. Additionally, at
Restructuring the Company issued a $1.6 billion note payable to CenterPoint
Energy. CenterPoint Energy assumed a $2.5 billion Senior A Credit Agreement,
dated as of July 13, 2001 among Houston Industries FinanceCo LP (a subsidiary of
Reliant Energy), Reliant Energy and the lender parties thereto, and a $1.8
billion Senior B Credit Agreement, dated as of July 13, 2001 among Houston
Industries FinanceCo LP, Reliant Energy and the lender parties thereto.
In a July 2002 order, the SEC limited the aggregate amount of our external
borrowings to $3.55 billion. Our ability to pay dividends is restricted by the
SEC's requirement that common equity as a percentage of total capitalization
must be at least 30% after the payment of any dividend. In addition, the order
restricts our ability to pay dividends out of capital accounts to the extent
current or retained earnings are insufficient for
6
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
those dividends. Under these restrictions, we are permitted to pay dividends in
excess of our current or retained earnings in an amount up to $200 million.
CERTAIN RECLASSIFICATIONS AND OTHER ITEMS
The consolidated financial statements presented herein have been revised to
give effect to the following items within CenterPoint Houston's historical
consolidated financial statements as reported in its Annual Report on Form 10-K
for the year ended December 31, 2002:
- certain reclassifications necessary to present the extinguishment of debt
recorded in the fourth quarter of 2002 as interest expense in accordance
with SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No.
145); and
- the retroactive effect of the adoption of Emerging Issues Task Force
Issue No. 02-03, "Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities", as it relates to the disclosure in Note 2 of
revenues of Reliant Resources which are included in discontinued
operations.
The items discussed above did not affect net income for any of the three
years ended December 31, 2002.
(2) DISCONTINUED OPERATIONS
The consolidated financial statements have been prepared to reflect the
effect of the Restructuring as described above as it relates to the Company, and
have been prepared based upon Reliant Energy's historical consolidated financial
statements.
The consolidated financial statements present operations of Reliant Energy
that were distributed to CenterPoint Energy in the Restructuring as discontinued
operations, in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS No. 144). Included in discontinued operations of CenterPoint Energy
Houston are the Wholesale Energy, European Energy, Retail Energy, Natural Gas
Distribution, Pipelines and Gathering and Electric Generation business segments.
Accordingly, the consolidated financial statements of CenterPoint Houston
reflect these operations as discontinued operations for each of the two years in
the period ended December 31, 2001 and for the eight months ended August 31,
2002.
Total revenues included in discontinued operations were $11.0 billion,
$14.2 billion and $10.1 billion in 2000, 2001 and 2002, respectively. Income
from discontinued operations for each of the two years in the period ended
December 31, 2001 is reported net of income tax expense of $120 million and $297
million 2000 and 2001, respectively. Income from discontinued operations for the
eight months ended August 31, 2002 is reported net of income tax expense of $254
million. Total revenues included in discontinued operations have been restated
to reflect Reliant Resources' adoption of EITF Issue No. 02-3 during the third
quarter of 2002, as reported in Reliant Resources' Annual Report on Form 10-K/A,
Amendment No. 1, filed with the SEC on April 30, 2003.
7
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized balance sheet information related to discontinued operations is
as follows as of December 31, 2001:
<Table>
<Caption>
DECEMBER 31,
2001
-------------
(IN MILLIONS)
CURRENT ASSETS:
Accounts and notes receivable, principally customer....... $ 2,340,838
Trading and marketing assets.............................. 1,611,393
Other current assets...................................... 2,414,338
-----------
Total current assets................................... 6,366,569
-----------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 11,698,901
-----------
OTHER ASSETS:
Goodwill.................................................. 2,631,570
Other noncurrent assets................................... 2,579,824
-----------
Total other assets..................................... 5,211,394
-----------
TOTAL ASSETS........................................... $23,276,864
-----------
CURRENT LIABILITIES:
Accounts payable, principally trade....................... $ 1,387,618
Trading and marketing liabilities......................... 1,478,336
Other current liabilities................................. 5,923,051
-----------
Total current liabilities.............................. 8,789,005
-----------
OTHER LONG-TERM LIABILITIES................................. 5,618,884
-----------
LONG-TERM DEBT.............................................. 2,788,426
-----------
TOTAL LIABILITIES...................................... 17,196,315
-----------
NET ASSETS OF DISCONTINUED OPERATIONS....................... $ 6,080,549
===========
</Table>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) RECLASSIFICATIONS AND USE OF ESTIMATES
In addition to the items discussed in Note 2, some amounts from the
previous years have been reclassified to conform to the 2002 presentation of
financial statements. These reclassifications do not affect net income.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
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.
(b) PRINCIPLES OF CONSOLIDATION
The accounts of the Company and its wholly owned subsidiary are included in
the Company's consolidated financial statements. All significant intercompany
transactions and balances are eliminated in consolidation.
8
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) REVENUES
The Company records revenue for electricity under the accrual method and
these revenues are generally recognized upon delivery. However, the
determination of the deliveries to individual customers is based on the reading
of their meters which is performed on a systematic basis throughout the month.
As a result of the implementation of the Texas Electric Choice Plan (Texas
electric restructuring law), the Company's regulated transmission and
distribution business recovers the cost of its service through an energy
delivery charge, and not as a component of the prior bundled rate, which
included energy and delivery charges. The design of the new energy delivery rate
differs from the prior bundled rate. The winter/summer rate differential for
residential customers has been eliminated and the energy component of the rate
structure has been removed, which will tend to lessen some of the pronounced
seasonal variation in revenues which has been experienced in prior periods. 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.
(d) LONG-LIVED ASSETS AND INTANGIBLES
The Company records property, plant and equipment at historical cost. The
Company expenses all repair and maintenance costs as incurred. The cost of
utility plant and equipment retirements is charged to accumulated depreciation.
Property, plant and equipment includes the following:
<Table>
<Caption>
DECEMBER 31,
ESTIMATED USEFUL -----------------
LIVES (YEARS) 2001 2002
---------------- ------- -------
(IN MILLIONS)
Transmission....................................... 28-75 $ 1,160 $ 1,251
Distribution....................................... 18-55 3,895 4,012
Other.............................................. 5-50 1,156 697
------- -------
Total.................................... 6,211 5,960
Accumulated depreciation........................... (2,146) (2,123)
------- -------
Property, plant and equipment, net............... $ 4,065 $ 3,837
======= =======
</Table>
The Company periodically evaluates long-lived assets, including property,
plant and equipment and specifically identifiable intangibles, when events or
changes in circumstances indicate that the carrying value of these assets may
not be recoverable. The determination of whether an impairment has occurred is
based on an estimate of undiscounted cash flows attributable to the assets, as
compared to the carrying value of the assets. To date, no impairment has been
indicated. The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" (SFAS
No. 142) on January 1, 2002. The Company had specific intangibles related to
land rights at December 31, 2001 and 2002 of $38 million (net of $8 million
accumulated amortization) and $40 million (net of $8 million accumulated
amortization), respectively. The Company amortizes these acquired intangibles on
a straight-line basis over the lesser of their contractual or estimated useful
lives that range between 50 and 75 years.
(e) REGULATORY ASSETS AND LIABILITIES
The Company applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71).
9
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a list of regulatory assets/liabilities reflected on the
Company's Consolidated Balance Sheets as of December 31, 2001 and 2002:
<Table>
<Caption>
DECEMBER 31,
----------------
2001 2002
------- ------
(IN MILLIONS)
Excess cost over market (ECOM) true-up...................... $ -- $ 697
Recoverable electric generation related regulatory assets,
net....................................................... 160 100
Securitized regulatory asset................................ 740 706
Regulatory tax asset, net................................... 111 178
Unamortized loss on reacquired debt......................... 62 58
Recoverable electric generation plant mitigation............ 1,967 2,051
Excess mitigation liability................................. (1,126) (969)
Other long-term assets/liabilities.......................... 28 40
------- ------
Total..................................................... $ 1,942 $2,861
======= ======
</Table>
If events were to occur that would make the recovery of these assets and
liabilities no longer probable, the Company would be required to write off or
write down these regulatory assets and liabilities. In addition, the Company
would be required to determine any impairment of the carrying costs of plant and
inventory assets.
Through December 31, 2001, the Public Utility Commission of Texas (Texas
Utility Commission) provided for the recovery of most of the Company's fuel and
purchased power costs from customers through a fixed fuel factor included in
electric rates. Included in the above table in recoverable electric generation-
related regulatory assets, net are $126 million and $66 million of regulatory
assets related to the recovery of fuel costs as of December 31, 2001 and 2002,
respectively. For additional information regarding our fuel filings, see Note
4(c).
In 2001, the Company monetized $738 million of regulatory assets in a
securitization financing authorized by the Texas Utility Commission pursuant to
the Texas electric restructuring law. The securitized regulatory assets are
being amortized ratably as transition charges are collected over the life of the
outstanding transition bonds. For additional information regarding the
securitization financing, see Note 6.
(f) DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation is computed using the straight-line method based on economic
lives or a regulatory mandated method. Other amortization expense includes
amortization of regulatory assets and other intangibles. See Notes 3(d) and 3(e)
for additional discussion of these items.
The following table presents depreciation and amortization expense for
2000, 2001 and 2002.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2000 2001 2002
------ ------ ------
(IN MILLIONS)
Depreciation expense........................................ $ -- $ -- $217
Amortization expense........................................ 357 299 54
---- ---- ----
Total depreciation and amortization....................... $357 $299 $271
==== ==== ====
</Table>
10
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction (AFUDC) represents the
approximate net composite interest cost of borrowed funds and a reasonable
return on the equity funds used for construction. Although AFUDC increases both
utility plant and earnings, it is realized in cash through depreciation
provisions included in rates. AFUDC is capitalized as a component of projects
under construction and will be amortized over the assets' estimated useful
lives. During 2000, 2001 and 2002, the Company capitalized AFUDC related to debt
of $4.0 million, $4.6 million and $3.7 million, respectively.
(h) INCOME TAXES
The Company is included in the consolidated income tax returns of
CenterPoint Energy. The Company calculates its income tax provision on a
separate return basis under a tax sharing agreement with CenterPoint Energy. The
Company uses the liability method of accounting for deferred income taxes and
measures deferred income taxes for all significant income tax temporary
differences. Investment tax credits were deferred and are being amortized over
the estimated lives of the related property. Current federal and certain state
income taxes are payable to or receivable from CenterPoint Energy. For
additional information regarding income taxes, see Note 9.
(i) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts and notes receivable, net, are net of an allowance for doubtful
accounts of $13 million and $5 million at December 31, 2001 and 2002,
respectively. The provisions for doubtful accounts in the Company's Statements
of Consolidated Income for 2000, 2001 and 2002 were $5 million, $13 million and
$10 million, respectively.
(j) INVENTORY
Inventory consists principally of materials and supplies and is valued at
average cost.
(k) STATEMENTS OF CONSOLIDATED CASH FLOWS
For purposes of reporting cash flows, the Company considers cash
equivalents to be short-term, highly liquid investments with maturities of three
months or less from the date of purchase. In connection with the issuance of
transition bonds in October 2001, the Company was required to establish
restricted cash accounts to collateralize the bonds that were issued in this
financing transaction. These restricted cash accounts are classified as
long-term as they are not available for withdrawal until the maturity of the
bonds. Cash and cash equivalents does not include restricted cash. For
additional information regarding the securitization financing, see Note 4(a).
(l) CHANGES IN ACCOUNTING PRINCIPLES AND NEW ACCOUNTING PRONOUNCEMENTS
See Note 3(d) for a discussion of the Company's adoption of SFAS No. 142 on
January 1, 2002.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No.
143 requires the fair value of an asset retirement obligation to be recognized
in the period in which it is incurred and capitalized as part of the cost of the
related tangible long-lived asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Retirement obligations associated with
long-lived assets included within the scope of SFAS No. 143 are those for which
a legal obligation exists under enacted laws, statutes and written or oral
contracts, including obligations arising under the doctrine of
11
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
promissory estoppel. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002, with earlier application encouraged.
As of January 1, 2003, the Company has not identified any asset retirement
obligations; however, the Company has previously recognized removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
December 31, 2002, these previously recognized removal costs of $240 million do
not represent SFAS No. 143 asset retirement obligations, but rather embedded
regulatory liabilities.
In August 2001, the FASB issued SFAS No. 144. SFAS No. 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," while retaining many of the requirements of these two
statements. Under SFAS No. 144, assets held for sale that are a component of an
entity will be included in discontinued operations if the operations and cash
flows will be or have been eliminated from the ongoing operations of the entity
and the entity will not have any significant continuing involvement in the
operations prospectively. SFAS No. 144 did not materially change the methods
used by the Company to measure impairment losses on long-lived assets, but may
result in more future dispositions being reported as discontinued operations
than would previously have been permitted. The Company adopted SFAS No. 144 on
January 1, 2002.
In April 2002, the FASB issued SFAS No. 145. SFAS No. 145 eliminates the
current requirement that gains and losses on debt extinguishment must be
classified as extraordinary items in the income statement. Instead, such gains
and losses will be classified as extraordinary items only if they are deemed to
be unusual and infrequent. SFAS No. 145 also requires that capital leases that
are modified so that the resulting lease agreement is classified as an operating
lease be accounted for as a sale-leaseback transaction. The changes related to
debt extinguishment are effective for fiscal years beginning after May 15, 2002,
and the changes related to lease accounting are effective for transactions
occurring after May 15, 2002. The Company has applied this guidance
prospectively as it relates to lease accounting and will apply the accounting
provisions to debt extinguishment in 2003. During 2002, the Company recorded a
$25 million loss on the early extinguishment of debt related to the Company's
$850 million term loan.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" (EITF No. 94-3). The principal difference
between SFAS No. 146 and EITF No. 94-3 relates to the requirements for
recognition of a liability for costs associated with an exit or disposal
activity. SFAS No. 146 requires that a liability be recognized for a cost
associated with an exit or disposal activity when it is incurred. A liability is
incurred when a transaction or event occurs that leaves an entity little or no
discretion to avoid the future transfer or use of assets to settle the
liability. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. In addition, SFAS No. 146
also requires that a liability for a cost associated with an exit or disposal
activity be recognized at its fair value when it is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002 with early application encouraged. The Company will apply the provisions of
SFAS No. 146 to all exit or disposal activities initiated after December 31,
2002.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of
12
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain guarantees. In addition, FIN 45 requires disclosures about the
guarantees that an entity has issued. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure provisions
of FIN 45 are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of FIN 45 is not expected to
materially affect the Company's consolidated financial statements. The Company
has adopted the additional disclosure provisions of FIN 45 in its consolidated
financial statements as of December 31, 2002.
(4) REGULATORY MATTERS
(a) TEXAS ELECTRIC RESTRUCTURING LAW AND DISCONTINUANCE OF SFAS NO. 71 FOR
ELECTRIC GENERATION OPERATIONS
In June 1999, the Texas legislature adopted the Texas electric
restructuring law, which substantially amended the regulatory structure
governing electric utilities in Texas in order to allow retail electric
competition. Retail pilot projects allowing competition for up to 5% of each
utility's load in all customer classes began in the third quarter of 2001, and
retail electric competition for all other customers began in January 2002. In
preparation for competition, CenterPoint Energy made significant changes in the
electric utility operations it conducts through the Company. In addition, the
Texas Utility Commission issued a number of new rules and determinations in
implementing the Texas electric restructuring law.
The Texas electric restructuring law defined the process for competition
and created a transition period during which most utility rates were frozen at
rates not in excess of their then-current levels. The Texas electric
restructuring law provided for utilities to recover their generation related
stranded costs and regulatory assets (as defined in the Texas electric
restructuring law).
Unbundling. As of January 1, 2002, electric utilities in Texas such as the
Company unbundled their businesses in order to separate power generation,
transmission and distribution, and retail activities into different units.
Pursuant to the Texas electric restructuring law, CenterPoint Energy submitted a
plan in January 2000 that was later amended and updated to accomplish the
required separation (the business separation plan). The Company continues to be
subject to cost-of-service rate regulation and is responsible for the
transmission and distribution of electricity to retail customers. The Company
transferred its Texas generation facilities that were formerly part of Reliant
Energy HL&P (Texas generation business) to Texas Genco in connection with the
Restructuring.
Transmission and Distribution Rates. All retail electric providers in the
Company's service area pay the same rates and other charges for transmission and
distribution services.
The Company's distribution rates charged to retail electric providers are
generally based on amounts of energy delivered. The Company's transmission rates
charged to other distribution companies are based on amounts of energy
transmitted under "postage stamp" rates that do not vary with the distance the
energy is being transmitted. All distribution companies in ERCOT pay the Company
the same rates and other charges for transmission services. The transmission and
distribution rates for the Company have been in effect since January 1, 2002,
when electric competition began. This regulated delivery charge includes the
transmission and distribution rate (which includes costs for nuclear
decommissioning and municipal franchise fees), a system benefit fund fee imposed
by the Texas electric restructuring law, a transition charge associated with
securitization of regulatory assets and an excess mitigation credit imposed by
the Texas Utility Commission.
Stranded Costs. The Company will be entitled to recover its stranded costs
(the excess of net regulatory book value of historical generation assets (as
defined by the Texas electric restructuring law) over the market value of those
assets) and its regulatory assets related to generation. The Texas electric
restructuring law prescribes specific methods for determining the amount of
stranded costs and the details for their recovery.
13
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the transition period to deregulation (the Transition Period), which
included 1998 and the first six months of 1999, and extending through the base
rate freeze period from July 1999 through 2001, the Texas electric restructuring
law provided that earnings above a stated overall annual rate of return on
invested capital be used to recover CenterPoint Energy's investment in
generation assets (Accelerated Depreciation). In addition, during the Transition
Period, the redirection of depreciation expense to generation assets that the
Company would otherwise apply to transmission, distribution and general plant
assets was permitted for regulatory purposes (Redirected Depreciation). Please
read the discussion of the accounting treatment for depreciation for financial
reporting purposes below under "-- Accounting." The Company cannot predict the
amount, if any, of these costs that may not be recovered.
In accordance with the Texas electric restructuring law, beginning on
January 1, 2002, and ending December 31, 2003, any difference between market
power prices received in Texas Genco's generation capacity auctions mandated by
the Texas electric restructuring law and the Texas Utility Commission's earlier
estimates of those prices will be included in the 2004 stranded cost true-up
proceeding, as further discussed below. This component of the true-up is
intended to ensure that neither the customers nor CenterPoint Energy is
disadvantaged economically as a result of the two-year transition period by
providing this pricing structure.
On October 24, 2001, CenterPoint Energy Transition Bond Company, LLC (Bond
Company), a Delaware limited liability company and wholly owned subsidiary of
the Company, issued $749 million aggregate principal amount of its Series 2001-1
Transition Bonds (Transition Bonds) pursuant to a financing order of the Texas
Utility Commission. Classes of the bonds have final maturity dates of September
15, 2007, September 15, 2009, September 15, 2011 and September 15, 2015, and
bear interest at rates of 3.84%, 4.76%, 5.16% and 5.63%, respectively. Scheduled
payments on the bonds are from 2002 through 2013. Net proceeds to the Bond
Company from the issuance were $738 million. The Bond Company paid the Company
$738 million for the transition property. Proceeds were used for general
corporate purposes, including the repayment of indebtedness.
The Transition Bonds are secured primarily by the "transition property,"
which includes the irrevocable right to recover, through non-bypassable
transition charges payable by certain retail electric customers, the qualified
costs of the Company authorized by the financing order. The holders of the Bond
Company's bonds have no recourse to any assets or revenues of the Company, and
the creditors of the Company have no recourse to any assets or revenues
(including, without limitation, the transition charges) of the Bond Company. The
Company has no payment obligations with respect to the Transition Bonds except
to remit collections of transition charges as set forth in a servicing agreement
between the Company and the Bond Company and in an intercreditor agreement among
the Company, the Bond Company and other parties.
The non-bypassable transition charges are required by the financing order
to be trued-up annually, effective November 1, for the term of the transition
charge. The Company filed an annual true-up with the Texas Utility Commission on
August 2, 2002 for transition charges that became effective November 1, 2002.
Costs associated with nuclear decommissioning will continue to be subject
to cost-of-service rate regulation and are included in a charge to transmission
and distribution customers. For further discussion of the effect of the business
separation plan on funding of the nuclear decommissioning trust fund, see Note
4(b).
True-Up Proceeding. The Texas electric restructuring law and current Texas
Utility Commission implementation guidance provide for a true-up proceeding to
be initiated in or after January 2004. The purpose of the true-up proceeding is
to quantify and reconcile the amount of stranded costs, the capacity auction
true-up, unreconciled fuel costs (see Note 3(e)), and other regulatory assets
associated with the Company's former electric generating operations that were
not previously securitized through the Transition Bonds. The 2004 true-up
proceeding will result in either additional charges being assessed on or credits
being
14
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issued to certain retail electric customers. CenterPoint Energy appealed the
Texas Utility Commission's true-up rule on the basis that there are no negative
stranded costs, that CenterPoint Energy should be allowed to collect interest on
stranded costs, and that the premium on the partial stock valuation applies to
only the equity of Texas Genco, not equity plus debt. The Texas court of appeals
issued a decision on February 6, 2003 upholding the rule in part and reversing
in part. The court ruled that there are no negative stranded costs and that the
premium on the partial stock valuation applies only to equity. The court upheld
the Texas Utility Commission's rule that interest on stranded costs begins upon
the date of the final true-up order. On February 21, 2003, CenterPoint Energy
filed a motion for rehearing on the issue that interest on amounts determined in
the true-up proceeding should accrue from an earlier date. CenterPoint Energy
has not accrued interest in its consolidated financial statements, but estimates
that interest could be material. If the court of appeals denies CenterPoint
Energy's motion, then CenterPoint Energy will have 45 days to appeal to the
Texas Supreme Court. CenterPoint Energy has not decided what action, if any, it
will take if the motion for rehearing is denied.
Accounting. Historically, CenterPoint Energy has applied the accounting
policies established in SFAS No. 71. Effective June 30, 1999, CenterPoint Energy
applied SFAS No. 101 to Texas Genco.
In 1999, CenterPoint Energy evaluated the effects that the Texas electric
restructuring law would have on the recovery of its generation related
regulatory assets and liabilities. CenterPoint Energy determined that a pre-tax
accounting loss of $282 million existed because it believes only the economic
value of its generation related regulatory assets (as defined by the Texas
electric restructuring law) will be recoverable. Therefore, the Company recorded
a $183 million after-tax extraordinary loss in the fourth quarter of 1999.
Pursuant to EITF Issue No. 97-4 "Deregulation of the Pricing of
Electricity -- Issues Related to the Application of FASB Statements No. 71 and
No. 101" (EITF No. 97-4), the remaining recoverable regulatory assets are now
associated with the Company. For details regarding the Company's regulatory
assets, see Note 3(e).
At June 30, 1999, CenterPoint Energy performed an impairment test of its
previously regulated electric generation assets pursuant to SFAS No. 121 on a
plant specific basis. Under SFAS No. 121, an asset is considered impaired, and
should be written down to fair value, if the future undiscounted net cash flows
expected to be generated by the use of the asset are insufficient to recover the
carrying amount of the asset. For assets that are impaired pursuant to SFAS No.
121, CenterPoint Energy determined the fair value for each generating plant by
estimating the net present value of future cash flows over the estimated life of
each plant. CenterPoint Energy determined that $797 million of electric
generation assets was impaired in 1999. The Texas electric restructuring law
provides for recovery of this impairment through regulated cash flows during the
transition period and through charges to transmission and distribution
customers. As such, a regulatory asset for an amount equal to Texas Genco's
impairment loss and was included on the Company's Consolidated Balance Sheets as
a regulatory asset. The Company recorded amortization expense related to the
recoverable impaired plant costs and other assets created from discontinuing
SFAS No. 71 of $221 million during the six months ended December 31, 1999, $329
million in 2000 and $247 million in 2001.
The impairment analysis requires estimates of possible future market
prices, load growth, competition and many other factors over the lives of the
plants. The resulting impairment loss is highly dependent on these underlying
assumptions. In addition, after January 10, 2004, the Company must finalize and
reconcile stranded costs (as defined by the Texas electric restructuring law) in
a filing with the Texas Utility Commission. Any positive difference between the
regulatory net book value and the fair market value of the generation assets (as
defined by the Texas electric restructuring law) will be collected through
future charges. Any overmitigation of stranded costs may be refunded by a
reduction in future charges. This final reconciliation allows alternative
methods of third party valuation of the fair market value of these assets,
including outright sale, stock valuations and asset exchanges.
15
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In order to reduce potential exposure to stranded costs related to
generation assets, the Company recognized Redirected Depreciation of $195
million and $99 million 1998 and for the six months ended June 30, 1999,
respectively, for regulatory and financial reporting purposes. This redirection
was in accordance with the Company's Transition Plan. Subsequent to June 30,
1999, Redirected Depreciation expense could no longer be recorded by CenterPoint
Energy's electric generation business for financial reporting purposes as these
operations are no longer accounted for under SFAS No. 71. During the six months
ended December 31, 1999 and during 2000 and 2001, $99 million, $218 million and
$230 million in depreciation expense, respectively, was redirected from
transmission and distribution for regulatory and financial reporting purposes
and was established as an embedded regulatory asset included in transmission and
distribution related plant and equipment balances. As of December 31, 2001, the
cumulative amount of Redirected Depreciation for regulatory purposes was $841
million, prior to the effects of the October 3, 2001 order discussed below.
Additionally, as allowed by the Texas Utility Commission, in an effort to
further reduce potential exposure to stranded costs related to generation
assets, the Company recorded Accelerated Depreciation of $194 million and $104
million in 1998 and for the six months ended June 30, 1999, respectively, for
regulatory and financial reporting purposes. Accelerated Depreciation expense
was recorded in accordance with the Company's Transition Plan during this
period. Subsequent to June 30, 1999, Accelerated Depreciation expense could no
longer be recorded by CenterPoint Energy's electric generation business for
financial reporting purposes, as these operations are no longer accounted for
under SFAS No. 71. During the six months ended December 31, 1999 and during 2000
and 2001, $179 million, $385 million and $264 million, respectively, of
Accelerated Depreciation was recorded for regulatory reporting purposes,
reducing the regulatory book value of the Company's stranded costs recovery.
The Texas Utility Commission issued a final order on October 3, 2001
(October 3, 2001 Order) that established the transmission and distribution
utility rates that became effective in January 2002. In this Order, the Texas
Utility Commission found that the Company had overmitigated its stranded costs
by redirecting transmission and distribution depreciation and by accelerating
depreciation of generation assets as provided under the Transition Plan and
Texas electric restructuring law. As a result of the October 3, 2001 Order, the
Company was required to reverse the $841 million embedded regulatory asset
related to Redirected Depreciation, thereby reducing the net book value of
transmission and distribution assets. The Company was required to record a
regulatory liability of $1.1 billion related to Accelerated Depreciation. The
October 3, 2001 Order requires this amount to be refunded through excess
mitigation credits to certain retail electric customers during a seven-year
period which began in January 2002.
As of December 31, 2002, in contemplation of the 2004 true-up proceeding,
the Company has recorded a regulatory asset of $2.0 billion representing the
estimated future recovery of previously incurred stranded costs, which includes
$1.1 billion of previously recorded Accelerated Depreciation plus Redirected
Depreciation, both reversed in 2001. Offsetting this regulatory asset is a $969
million regulatory liability to refund the excess mitigation to ratepayers. This
estimated recovery is based upon current projections of the market value of
CenterPoint Energy's Texas generation assets to be covered by the 2004 true-up
proceeding calculations. The regulatory liability reflects a current refund
obligation arising from prior mitigation of stranded costs deemed excessive by
the Texas Utility Commission. The Company began refunding excess mitigation
credits with January 2002 bills. These credits are to be refunded over a
seven-year period. Because accounting principles generally accepted in the
United States of America require the Company to estimate fair market values in
advance of the final reconciliation, the financial impacts of the Texas electric
restructuring law with respect to the final determination of stranded costs in
the 2004 true-up proceeding are subject to material changes. Factors affecting
such changes may include estimation risk, uncertainty of future energy and
commodity prices and the economic lives of the plants. If events were to occur
that made the recovery of some of the remaining generation related regulatory
assets no longer probable, the Company would write off the unrecoverable balance
of such assets as a charge against earnings.
16
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) AGREEMENTS RELATED TO TEXAS GENERATING ASSETS
Texas Genco is the beneficiary of the decommissioning trust that has been
established to provide funding for decontamination and decommissioning of the
South Texas Project in which Texas Genco owns a 30.8% interest. The Company
collects through rates or other authorized charges to its electric utility
customers amounts designated for funding the decommissioning trust, and pays the
amounts to Texas Genco. Texas Genco in turn deposits these amounts into the
decommissioning trust. Upon decommissioning of the facility, in the event funds
from the trust are inadequate, the Company or its successor will be required to
collect through rates or other authorized charges to customers as contemplated
by the Texas Utilities Code all additional amounts required to fund Texas
Genco's obligations relating to the decommissioning of the facility. Following
the completion of the decommissioning, if surplus funds remain in the
decommissioning trust, the excess will be refunded to the ratepayers of the
Company or its successor.
(c) CENTERPOINT HOUSTON REGULATORY FILINGS
Texas Genco and the Company filed their joint application to reconcile fuel
revenues and expenses with the Texas Utility Commission on July 1, 2002. This
final fuel reconciliation filing covers reconcilable fuel revenue, fuel expense
and interest of approximately $8.5 billion incurred from August 1, 1997 through
January 30, 2002. Also included in this amount is an under-recovery of $94
million, which was the balance at July 31, 1997 as approved in the Company's
last fuel reconciliation. On January 28, 2003, a settlement agreement was
reached under which it was agreed that certain items totaling $24 million were
written off during the fourth quarter of 2002 and items totaling $203 million
will be carried forward for resolution by the Texas Utility Commission in late
2003 or early 2004.
(5) RELATED PARTY TRANSACTIONS
From time to time, the Company has advanced money to, or borrowed money
from, CenterPoint Energy or its subsidiaries. As of December 31, 2001, the
Company had net accounts payable of $40 million included in accounts
payable-affiliated companies. As of December 31, 2002, the Company had net
short-term borrowings of $226 million included in notes payable-affiliated
companies. As of December 31, 2002, the Company had net accounts payable of $44
million included in accounts payable-affiliated companies. As of December 31,
2002, the Company had net short-term notes payables of $48 million and $167
million current portion of long-term note payable to affiliate included in notes
payable-affiliated companies. As of December 31, 2001, the Company had net
long-term borrowings, included in notes payable-affiliated companies, totaling
$11 million. As of December 31, 2002, the Company had a $815 million long-term
note receivable from affiliate, as further discussed below, and a $1.1 billion
long-term note payable to affiliate as further discussed in Note 6. Net interest
expense on these borrowings was $27 million, $30 million and $72 million in
2000, 2001 and 2002, respectively.
Prior to August 31, 2002, the Company had $737 million invested in a money
fund through which the Company and certain of its affiliates could borrow and/or
invest on a short-term basis. At the time of the Restructuring, the Company
converted a money fund investment into a $750 million note receivable from
CenterPoint Energy payable on demand and bearing interest at the prime rate,
leaving $13 million borrowed from the money fund. Since August 31, 2002, the
Company has been a participant in the CenterPoint Energy money pool. The $750
million note receivable is included in long-term notes receivable from affiliate
in the Consolidated Balance Sheets because the Company does not plan to demand
repayment of the note within the next twelve months.
In 2002, revenues derived from energy delivery charges provided by the
Company to a subsidiary of Reliant Resources, Inc. (Reliant Resources), a former
affiliate, totaled $940 million.
17
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although the former retail sales business is no longer conducted by the
Company, retail customers remained regulated customers of the Company through
the date of their first meter reading in January 2002. During this transition
period, the Company purchased $48 million of power from Texas Genco.
In 2000 and 2001, a subsidiary of Reliant Resources, a former affiliate,
provided certain support services to the Company totaling $22 million and $53
million, respectively.
CenterPoint Energy provides some corporate services to the Company. The
costs of services have been directly charged to the Company using methods that
management believes are reasonable. These methods include negotiated usage
rates, dedicated asset assignment, and proportionate corporate formulas based on
assets, operating expenses and employees. These charges are not necessarily
indicative of what would have been incurred had the Company not been an
affiliate. Amounts charged to the Company for these services were $116 million
for 2002 and are included primarily in operation and maintenance expenses.
(6) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2002
---------------------- ----------------------
LONG-TERM CURRENT(1) LONG-TERM CURRENT(1)
--------- ---------- --------- ----------
(IN MILLIONS)
Short-term borrowings:
Commercial paper................................ $ -- $164 $ -- $ --
------ ---- ------ ----
Total short-term borrowings.................. -- 164 -- --
Long-term debt:
Medium-term notes and pollution control bonds
4.90% to 6.70% due 2003 to 2027 (2)(3)....... 547 -- -- --
Pollution control bonds 4.70% to 5.95% due 2011
to 2030...................................... 1,046 100 -- --
First mortgage bonds 7.50% to 9.15% due 2021 to
2023(3)...................................... 615 -- 615 --
Term loan, LIBOR plus 9.75%, due 2005(4)........ -- -- 1,310 --
Series 2001-1 Transition Bonds 3.84% to 5.63%
due 2002 to 2013(5).......................... 736 13 717 19
Debentures 7.40% due 2002....................... -- 300 -- --
Other........................................... 3 1 (1) --
------ ---- ------ ----
Long-term debt to third parties.............. 2,947 414 2,641 19
Note payable to affiliate 4.90% to
6.70%(6)................................... 11 -- 916 167
------ ---- ------ ----
Total borrowings............................. $2,958 $578 $3,557 $186
====== ==== ====== ====
</Table>
- ---------------
(1) Includes amounts due within one year of the date noted.
(2) These series of debt are secured by the Company's first mortgage bonds.
(3) The December 31, 2001 debt balances have been reclassified to give effect to
the Restructuring, which occurred on August 31, 2002.
(4) LIBOR has a minimum rate of 3%. This collateralized term loan is secured by
the Company's general mortgage bonds.
(5) The Series 2001-1 Transition Bonds were issued by one of the Company's
subsidiaries, and are non-recourse to the Company. For further discussion of
the securitization financing, see Note 4(a).
18
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) Of the total $1.1 billion notes payable to affiliate at December 31, 2002,
$547 million has the same principal amounts and interest rates as the
medium-term notes and pollution control bonds of CenterPoint Energy that are
secured by first mortgage bonds of CenterPoint Houston.
Assumption and Release of Certain Debt
In connection with the Restructuring, Reliant Energy transferred assets and
subsidiaries to CenterPoint Energy or its subsidiaries and became a subsidiary
of CenterPoint Energy. As part of the Restructuring, each share of Reliant
Energy common stock was converted into one share of CenterPoint Energy common
stock. The Company's operating subsidiaries which were distributed in connection
with the Restructuring and presented as discontinued operations included $2.1
billion of indebtedness. An additional $1.9 billion of indebtedness was assumed
by CenterPoint Energy at the time of the Restructuring, consisting of $1.6
billion of debt and $0.3 billion of trust preferred securities that were
reflected in continuing operations in the Company's Consolidated Balance Sheet
as of December 31, 2001. Additionally, at Restructuring the Company issued a
$1.6 billion note payable to CenterPoint Energy. CenterPoint Energy also assumed
a $2.5 billion Senior A Credit Agreement, dated as of July 13, 2001 among
Houston Industries FinanceCo LP (a subsidiary of Reliant Energy), Reliant Energy
and the lender parties thereto, and a $1.8 billion Senior B Credit Agreement,
dated as of July 13, 2001 among Houston Industries FinanceCo LP, Reliant Energy
and the lender parties thereto.
Bank Loans
As of December 31, 2002, the Company had no bank loans or revolving credit
facilities. At December 31, 2002, the Company had short-term loans from
affiliates of $48 million. The weighted average interest rate on the Company's
short-term borrowings at December 31, 2001 and 2002 was 3.36% and 6.2%,
respectively. At December 31, 2001, the Company had a $400 million credit
facility, which was replaced on October 10, 2002 by an $850 million secured
credit facility which was subsequently repaid on November 12, 2002 as discussed
below.
In February 2003, the Company obtained a $75 million revolving credit
facility that terminates on April 30, 2003. A condition precedent to utilizing
the facility is that security in the form of general mortgage bonds must be
delivered to the lender. Rates for borrowings under this facility, including the
facility fee, will be LIBOR plus 250 basis points.
Money Pool Borrowings
On December 31, 2002, the Company had borrowed $48 million from its
affiliates. 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 money
pool's net funding requirements are generally met with short-term borrowings of
CenterPoint Energy. The terms of the money pool are in accordance with
requirements applicable to registered public utility holding companies under the
1935 Act.
19
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term Debt
The following table shows future maturity dates of long-term debt issued by
CenterPoint Houston and expected future maturity dates of the Transition Bonds
issued by the Bond Company as of December 31, 2002. Amounts are expressed in
thousands.
<Table>
<Caption>
CENTERPOINT HOUSTON
------------------------ TRANSITION
YEAR THIRD-PARTY AFFILIATE SUB-TOTAL BONDS TOTAL
- ---- ----------- ---------- ---------- ---------- ----------
2003...................... $ 166,600 $ 166,600 $ 18,722 $ 185,322
2004...................... 41,189 41,189
2005...................... $1,310,000 1,310,000 46,806 1,356,806
2006...................... 54,295 54,295
2007...................... 59,912 59,912
2008...................... 65,529 65,529
2009...................... 73,018 73,018
2010...................... 80,506 80,506
2011...................... 87,995 87,995
2012...................... 45,570 45,570 99,229 144,799
2013...................... 108,590 108,590
2015...................... 150,850 150,850 150,850
2017...................... 127,385 127,385 127,385
2021...................... 102,442 102,442 102,442
2022...................... 62,275 62,275 62,275
2023...................... 450,000 450,000 450,000
2027...................... 56,095 56,095 56,095
2028...................... 536,500 536,500 536,500
---------- ---------- ---------- -------- ----------
Total..................... $1,924,717 $1,083,000 $3,007,717 $735,791 $3,743,508
========== ========== ========== ======== ==========
</Table>
First mortgage bonds in an aggregate principal amount of $615 million have
been issued directly to third parties. External debt of $1.3 billion maturing in
2005 is senior and secured by general mortgage bonds. The affiliate debt is
senior and unsecured.
As of October 10, 2002, CenterPoint Houston increased the size of its
credit facility to $850 million in connection with the amendment and extension
of its bank facility and the bank facilities of its parent. Proceeds from the
loan were used to (1) repay maturing loans under a $400 million credit facility
and (2) repay $450 million of the note payable to CenterPoint Energy. The $850
million facility was secured by $850 million aggregate principal amount of
CenterPoint Houston's general mortgage bonds issued under CenterPoint Houston's
General Mortgage dated as of October 10, 2002. The lien of the General Mortgage
is junior to that of CenterPoint Houston's Mortgage and Deed of Trust dated as
of November 1, 1944. The $850 million of general mortgage bonds was released by
the banks upon the November 2002 repayment and termination of the facility using
proceeds from CenterPoint Houston's $1.3 billion collateralized term loan as
discussed below.
On November 12, 2002, CenterPoint Houston entered into a $1.3 billion
collateralized term loan maturing November 2005. The interest rate on the loan
is the London inter-bank offered rate (LIBOR) plus 9.75%, subject to a minimum
rate of 12.75%. The loan is secured by CenterPoint Houston's general mortgage
bonds. Proceeds from the loan were used to (1) repay CenterPoint Houston's $850
million term loan as
20
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discussed above, (2) repay $100 million of intercompany notes maturing in 2028,
(3) repay $300 million of debt that matured on November 15, 2002 and (4) pay
transaction costs. The loan agreement contains various business and financial
covenants including a covenant restricting CenterPoint Houston's debt, excluding
transition bonds, as a percent of its total capitalization to 68%. The loan
agreement also limits incremental secured debt that may be issued by CenterPoint
Houston to $300 million.
Other than the affiliate notes due 2028, the amounts, maturities and
interest rates of the intercompany debt payable to CenterPoint Energy of $547
million effectively match the amounts, maturities and interest rates of
medium-term notes and certain pollution control bond obligations of CenterPoint
Energy that are secured by the Company's first mortgage bonds in the same
amounts in the table below.
The following table shows the maturity dates of the $1.1 billion of first
mortgage bonds and general mortgage bonds that the Company has issued as
collateral for long-term debt of CenterPoint Energy. These bonds are not
reflected on the financial statements of CenterPoint Houston because of the
contingent nature of the obligations. Amounts are expressed in thousands.
<Table>
<Caption>
YEAR FIRST MORTGAGE BONDS GENERAL MORTGAGE BONDS TOTAL
- ---- -------------------- ---------------------- ----------
2003.............................. $166,600 $ 166,600
2011.............................. $ 19,200 19,200
2012.............................. 45,570 45,570
2015.............................. 150,850 150,850
2017.............................. 127,385 127,385
2018.............................. 50,000 50,000
2019.............................. 200,000 200,000
2020.............................. 90,000 90,000
2026.............................. 100,000 100,000
2027.............................. 56,095 56,095
2028.............................. 68,000 68,000
-------- -------- ----------
Total............................. $546,500 $527,200 $1,073,700
======== ======== ==========
</Table>
The aggregate amount of additional general mortgage bonds and first
mortgage bonds that could be issued is approximately $900 million based on
estimates of the value of property encumbered by the general mortgage, the cost
of such property and the 70% bonding ratio contained in the general mortgage.
The issuance of additional first mortgage and general mortgage bonds is
currently contractually limited to an additional $300 million in general
mortgage bonds. As of December 31, 2002, outstanding first mortgage bonds and
general mortgage bonds aggregated approximately $3.0 billion.
The Bond Company has $736 million aggregate principal amount of outstanding
Transition Bonds. Classes of the Transition Bonds have final maturity dates of
September 15, 2007, September 15, 2009, September 15, 2011 and September 15,
2015 and bear interest at rates of 3.84%, 4.76%, 5.16% and 5.63%, respectively.
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 and
a tariff issued by the Texas Utility Commission. The Transition Bonds are
reported as CenterPoint Houston's long-term debt, although the holders of the
Transition Bonds have no recourse to any of CenterPoint Houston's assets or
revenues, and CenterPoint Houston's creditors have no recourse to any assets or
revenues (including, without limitation, the transition charges) of the Bond
Company. CenterPoint Houston has no payment obligations with respect to the
Transition Bonds except to remit collections of transition charges as set forth
in
21
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a servicing agreement between CenterPoint Houston and the Bond Company and in an
intercreditor agreement among CenterPoint Houston, our indirect transition bond
subsidiary and other parties.
Liens. The Company's assets are subject to liens securing approximately
$1.2 billion of first mortgage bonds. Sinking or improvement fund and
replacement fund requirements on the first mortgage bonds may be satisfied by
certification of property additions. Sinking fund and replacement fund
requirements for 2000, 2001 and 2002 have been satisfied by certification of
property additions. The replacement fund requirement to be satisfied in 2003 is
approximately $347 million, and the sinking fund requirement to be satisfied in
2003 is approximately $15 million. The Company expects to meet these 2003
obligations by certification of property additions. The Company's assets are
subject to liens securing approximately $1.8 billion of general mortgage bonds,
which are junior to the liens of the first mortgage bonds.
(7) TRUST PREFERRED SECURITIES
As part of the Restructuring on August 31, 2002, CenterPoint Energy assumed
the junior subordinated debt obligations related to trust preferred securities
from the Company. For additional information on the Restructuring, see Note 1.
(8) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
Substantially all of the Company's employees participate in CenterPoint
Energy's qualified non-contributory pension plan. Under the cash balance
formula, participants accumulate a retirement benefit based upon 4% of eligible
earnings and accrued interest. Prior to 1999, the pension plan accrued benefits
based on years of service, final average pay and covered compensation. As a
result, certain employees participating in the plan as of December 31, 1998 are
eligible to receive the greater of the accrued benefit calculated under the
prior plan through 2008 or the cash balance formula.
CenterPoint Energy's funding policy is to review amounts annually in
accordance with applicable regulations in order to achieve adequate funding of
projected benefit obligations. Pension expense is allocated to the Company based
on covered employees. This calculation is intended to allocate pension costs in
the same manner as a separate employer plan. Assets of the plan are not
segregated or restricted by CenterPoint Energy's participating subsidiaries.
Pension benefit was $10 million and $6 million for the years ended December 31,
2000 and 2001, respectively. The Company recognized pension expense of $7
million for the year ended December 31, 2002.
In addition to the Plan, the Company participates in CenterPoint Energy's
non-qualified pension plan, which allows participants to retain the benefits to
which they would have been entitled under the qualified pension plan except for
federally mandated limits on these benefits or on the level of salary on which
these benefits may be calculated. The expense associated with the non-qualified
pension plan was $3 million in 2000 and less than $1 million in 2001 and 2002.
As of December 31, 2001, CenterPoint Energy allocated $83 million of
pension assets, $7 million of non-qualified pension liabilities and $2 million
of minimum pension liabilities to the Company. As of December 31, 2002,
CenterPoint Energy has not allocated such pension assets or liabilities to the
Company. This change in method of allocation had no impact on pension expense
recorded for the year ended December 31, 2002.
22
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) SAVINGS PLAN
The Company participates in CenterPoint Energy's qualified savings plan,
which includes a cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code of 1986, as amended. Under the plan, participating
employees may contribute a portion of their compensation, on a pre-tax or
after-tax basis, generally up to a maximum of 16% of compensation. The Company
matches 75% of the first 6% of each employee's compensation contributed. The
Company may contribute an additional discretionary match of up to 50% of the
first 6% of each employee's compensation contributed. These matching
contributions are fully vested at all times. A substantial portion of the
matching contribution is initially invested in CenterPoint Energy common stock.
CenterPoint Energy allocates to the Company the savings plan benefit expense
related to the Company's employees.
Savings plan benefit expense was $14 million, $10 million and $14 million
for the years ended December 31, 2000, 2001 and 2002, respectively.
(c) POSTRETIREMENT BENEFITS
The Company's employees participate in CenterPoint Energy's plans which
provide certain healthcare and life insurance benefits for retired employees on
a contributory and non-contributory basis. Employees become eligible for these
benefits if they have met certain age and service requirements at retirement, as
defined in the plans. Under plan amendments effective in early 1999, health care
benefits for future retirees were changed to limit employer contributions for
medical coverage. Such benefit costs are accrued over the active service period
of employees.
The Company is required to fund a portion of its obligations in accordance
with rate orders. All other obligations are funded on a pay-as-you-go basis.
The net postretirement benefit cost includes the following components:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------
2000 2001 2002
----- ----- -----
(IN MILLIONS)
Service cost -- benefits earned during the period........... $ 1 $ 1 $ 1
Interest cost on projected benefit obligation............... 10 11 13
Expected return on plan assets.............................. (6) (6) (7)
Net amortization............................................ 7 7 6
--- --- ---
Net postretirement benefit cost............................. $12 $13 $13
=== === ===
</Table>
23
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are the Company's reconciliations of beginning and ending
balances of its postretirement benefit plans benefit obligation, plan assets and
funded status for 2001 and 2002.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
---------------
2001 2002
------ ------
(IN MILLIONS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year....................... $ 153 $ 173
Service cost................................................ 1 1
Interest cost............................................... 11 13
Participant contributions................................... 2 2
Benefits paid............................................... (3) (4)
Actuarial loss (gain)....................................... 9 (9)
------ ------
Benefit obligation, end of year............................. $ 173 $ 176
====== ======
CHANGE IN PLAN ASSETS
Plan assets, beginning of year.............................. $ 63 $ 72
Employer contributions...................................... 13 10
Participant contributions................................... 2 2
Benefits paid............................................... (3) (4)
Actual investment return.................................... (3) (6)
------ ------
Plan assets, end of year.................................... $ 72 $ 74
====== ======
RECONCILIATION OF FUNDED STATUS
Funded status............................................... $ (101) $ (102)
Unrecognized transition obligation.......................... 52 48
Unrecognized prior service cost............................. 24 22
Unrecognized actuarial loss................................. -- 4
------ ------
Net amount recognized at end of year........................ $ (25) $ (28)
====== ======
ACTUARIAL ASSUMPTIONS
Discount rate............................................... 7.25% 6.75%
Expected long-term rate of return on assets................. 9.5% 9.0%
</Table>
For the year ended December 31, 2001, the assumed health care cost trend
rates were 7.5% for participants under age 65 and 8.5% for participants age 65
and over. For the year ended December 31, 2002, the assumed health cost trend
rate was increased to 12% for all participants. The health care cost trend rates
decline by .75% annually to 5.5% by 2011.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of December 31, 2002 would
increase by approximately 4.4%. The annual effect of the 1% increase on the
total of the service and interest costs would be an increase of approximately
3.7%. If the health care cost trend rate assumptions were decreased by 1%, the
accumulated postretirement benefit obligation as of December 31, 2002 would
decrease by approximately 4.4%. The annual effect of the 1% decrease on the
total of the service and interest costs would be a decrease of 3.7%.
24
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's postretirement obligation is presented as a liability in the
Consolidated Balance Sheet under the caption Benefit Obligations.
(d) POSTEMPLOYMENT BENEFITS
The Company provides postemployment benefits through CenterPoint Energy's
plans for former or inactive employees, their beneficiaries and covered
dependents, after employment but before retirement (primarily health care and
life insurance benefits for participants in the long-term disability plan).
Postemployment benefits costs were $3 million and $6 million for the years ended
December 31, 2001 and 2002, respectively. The Company recognized postemployment
benefit income of $1 million for the year ended December 31, 2000.
(e) OTHER NON-QUALIFIED PLANS
The Company participates in CenterPoint Energy's deferred compensation
plans which permit eligible participants to elect each year to defer a
percentage of that year's salary and up to 100% of that year's annual bonus. In
general, employees who attain the age of 60 during employment and participate in
CenterPoint Energy's deferred compensation plans may elect to have their
deferred compensation amounts repaid in (a) fifteen equal annual installments
commencing at the later of age 65 or termination of employment or (b) a lump-sum
distribution following termination of employment. Interest generally accrues on
deferrals at a rate equal to the average Moody's Long-Term Corporate Bond Index
plus 2%, determined annually until termination when the rate is fixed at the
rate in effect for the plan year immediately prior to that in which a
participant attains age 65. The Company recorded interest expense related to its
deferred compensation obligation of $3 million, $2 million and $2 million for
the years ended December 31, 2000, 2001 and 2002, respectively. The discounted
deferred compensation obligation recorded by the Company was $41 million and $19
million as of December 31, 2001 and 2002, respectively.
(f) OTHER EMPLOYEE MATTERS
As of December 31, 2002, the Company employed approximately 3,286 people.
Of these employees, approximately 47% are covered by collective bargaining
agreements which will expire in May 2003.
(9) INCOME TAXES
The Company's current and deferred components of income tax expense are as
follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------
2000 2001 2002
------ ------- ------
(IN MILLIONS)
Federal
Total current............................................. $170 $ 360 $(62)
Total deferred............................................ 63 (132) 348
---- ----- ----
Income tax expense.......................................... $233 $ 228 $286
==== ===== ====
</Table>
25
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2000 2001 2002
------ ------ ------
(IN MILLIONS)
Income from continuing operations before income taxes....... $724 $674 $833
Federal statutory rate.................................... 35% 35% 35%
---- ---- ----
Income tax expense at statutory rate........................ 253 236 292
---- ---- ----
Increase (decrease) in tax resulting from:
Amortization of investment tax credit..................... (5) (5) (5)
Excess deferred taxes..................................... -- -- (2)
AFUDC Equity.............................................. (2) (2) --
Other, net................................................ (13) (1) 1
---- ---- ----
Total.................................................. (20) (8) (6)
---- ---- ----
Income tax expense.......................................... $233 $228 $286
==== ==== ====
Effective Rate.............................................. 32.2% 33.8% 34.3%
</Table>
Following are the Company's tax effects of temporary differences between
the carrying amounts of assets and liabilities in the financial statements and
their respective tax bases:
<Table>
<Caption>
DECEMBER 31,
---------------
2001 2002
------ ------
(IN MILLIONS)
Deferred tax assets:
Non-current:
Employee benefits...................................... $ 11 $ 49
Other.................................................. -- 2
------ ------
Total non-current deferred tax assets............. 11 51
------ ------
Deferred tax liabilities:
Non-current:
Depreciation........................................... 651 832
Regulatory assets, net................................. 406 621
Other.................................................. 10 17
------ ------
Total deferred tax liabilities.................... 1,067 1,470
------ ------
Accumulated deferred income taxes, net............ $1,056 $1,419
====== ======
</Table>
The Company is included in the consolidated income tax returns of
CenterPoint Energy. CenterPoint Energy's consolidated federal income tax returns
have been audited and settled through the 1996 tax year. The 1997, 1998 and 1999
consolidated federal income tax returns are currently under audit. No audit
adjustments that would impact the Company have been proposed for the current
audit cycle.
26
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The following table sets forth information concerning the Company's
obligations under non-cancelable long-term operating leases at December 31,
2002, which primarily consist of rental agreements for building space, data
processing equipment and vehicles, including major work equipment (in millions).
<Table>
2003........................................................ $ 5
2004........................................................ 5
2005........................................................ 5
2006........................................................ 6
2007........................................................ 6
---
Total $27
===
</Table>
Total lease expense for all operating leases was $3 million during 2000 and
$5 million during 2001 and 2002, respectively.
(b) LEGAL MATTERS
The Company's predecessor, Reliant Energy, and certain of its former
subsidiaries are named as defendants in several lawsuits described below. Under
a master separation agreement between Reliant Energy and Reliant Resources,
CenterPoint Energy and its subsidiaries, including the Company, are entitled to
be indemnified by Reliant Resources for any losses arising out of the lawsuits
described under "California Class Actions and Attorney General Cases,"
"Long-Term Contract Class Action," "Washington and Oregon Class Actions,"
"Bustamante Price Reporting Class Action" and "Trading and Marketing
Activities," including attorneys' fees and other costs. Pursuant to the
indemnification obligation, Reliant Resources is defending CenterPoint Energy
and its subsidiaries, including the Company, to the extent named in these
lawsuits. The ultimate outcome of these matters cannot be predicted at this
time.
California Class Actions and Attorney General Cases. Reliant Energy,
Reliant Resources, Reliant Energy Services, Inc. (Reliant Energy Services),
Reliant Energy Power Generation, Inc. (REPG) and several other subsidiaries of
Reliant Resources, as well as two former officers and one present officer of
some of these companies, have been named as defendants in class action lawsuits
and other lawsuits filed against a number of companies that own generation
plants in California and other sellers of electricity in California markets.
While the plaintiffs allege various violations by the defendants of antitrust
laws and state laws against unfair and unlawful business practices, each of the
lawsuits is grounded on the central allegation that the defendants conspired to
drive up the wholesale price of electricity. In addition to injunctive relief,
the plaintiffs in these lawsuits seek treble the amount of damages alleged,
restitution of alleged overpayments, disgorgement of alleged unlawful profits
for sales of electricity, costs of suit and attorneys' fees. All of these suits
originally were filed in state courts in San Diego, San Francisco and Los
Angeles Counties. The suits in San Diego and Los Angeles Counties were
consolidated and removed to the federal district court in San Diego, but on
December 13, 2002, that court remanded the suits to the state courts. Prior to
the remand, Reliant Energy was voluntarily dismissed from two of the suits.
Several parties, including the Reliant defendants, have appealed the judge's
remand decision. The United States court of appeals has entered a briefing
schedule that could result in oral arguments by summer of 2003. Proceedings
before the state court are expected to resume during the first quarter of 2003.
In March and April 2002, the California Attorney General filed three
complaints, two in state court in San Francisco and one in the federal district
court in San Francisco, against Reliant Energy, Reliant
27
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Resources, Reliant Energy Services and other subsidiaries of Reliant Resources
alleging, among other matters, violations by the defendants of state laws
against unfair and unlawful business practices arising out of transactions in
the markets for ancillary services run by the California independent systems
operator, charging unjust and unreasonable prices for electricity, in violation
of antitrust laws in connection with the acquisition in 1998 of electric
generating facilities located in California. The complaints variously seek
restitution and disgorgement of alleged unlawful profits for sales of
electricity, civil penalties and fines, injunctive relief against unfair
competition, and undefined equitable relief. Reliant Resources has removed the
two state court cases to the federal district court in San Francisco where all
three cases are now pending.
Following the filing of the Attorney General cases, seven additional class
action cases were filed in state courts in Northern California. Each of these
purports to represent the same class of California ratepayers, assert the same
claims as asserted in the other California class action cases, and in some
instances repeat as well the allegations in the Attorney General cases. All of
these cases have been removed to federal district court in San Diego. Reliant
Resources has not filed an answer in any of these cases. The plaintiffs have
agreed to a stipulated order that would require the filing of a consolidated
complaint by early March 2003 and the filing of the defendants' initial response
to the complaint within 60 days after the consolidated complaint is filed. In
all of these cases before the federal and state courts in California, the
Reliant defendants have filed or intend to file motions to dismiss on grounds
that the claims are barred by federal preemption and the filed rate doctrine.
Long-Term Contract Class Action. In October 2002, a class action was filed
in state court in Los Angeles against Reliant Energy and several subsidiaries of
Reliant Resources. The complaint in this case repeats the allegations asserted
in the California class actions as well as the Attorney General cases and also
alleges misconduct related to long-term contracts purportedly entered into by
the California Department of Water Resources. None of the Reliant entities,
however, has a long-term contract with the Department of Water Resources. This
case has been removed to federal district court in San Diego.
Washington and Oregon Class Actions. In December 2002, a lawsuit was filed
in Circuit Court of the State of Oregon for the County of Multnomah on behalf of
a class of all Oregon purchasers of electricity and natural gas. Reliant Energy,
Reliant Resources and several Reliant Resources subsidiaries are named as
defendants, along with many other electricity generators and marketers. Like the
other lawsuits filed in California, the plaintiffs claim the defendants
manipulated wholesale power prices in violation of state and federal law. The
plaintiffs seek injunctive relief and payment of damages based on alleged
overcharges for electricity. Also in December 2002, a nearly identical lawsuit
on behalf of consumers in the State of Washington was filed in federal district
court in Seattle. Reliant Resources has removed the Oregon suit to federal
district court in Portland. It is anticipated that before answering the
lawsuits, the defendants will file motions to dismiss on the grounds that the
claims are barred by federal preemption and by the filed rate doctrine.
Bustamante Price Reporting Class Action. In November 2002, California
Lieutenant Governor Cruz Bustamante filed a lawsuit in state court in Los
Angeles on behalf of a class of purchasers of gas and power alleging violations
of state antitrust laws and state laws against unfair and unlawful business
practices based on an alleged conspiracy to report and publish false and
fraudulent natural gas prices with an intent to affect the market prices of
natural gas and electricity in California. Reliant Energy, Reliant Resources and
several Reliant Resources subsidiaries are named as defendants, along with other
market participants and publishers of some of the price indices. The complaint
seeks injunctive relief, compensatory and punitive damages, restitution of
alleged overpayment, disgorgement of all profits and funds acquired by the
alleged unlawful conduct, costs of suit and attorneys' fees. The parties have
stipulated to a schedule that would require the defendants to respond to the
complaint by March 31, 2003. The Reliant defendants intend to deny both their
alleged violation of any laws and their alleged participation in any conspiracy.
28
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trading and Marketing Activities. Reliant Energy has been named as a party
in several lawsuits and regulatory proceedings relating to the trading and
marketing activities of its former subsidiary, Reliant Resources.
In June 2002, the SEC advised Reliant Resources and Reliant Energy that it
had issued a formal order in connection with its investigation of Reliant
Resources' financial reporting, internal controls and related matters. The
Company understands that the investigation is focused on Reliant Resources'
same-day commodity trading transactions involving purchases and sales with the
same counterparty for the same volume at substantially the same price and
certain structured transactions. These matters were previously the subject of an
informal inquiry by the SEC. Reliant Resources and CenterPoint Energy are
cooperating with the SEC staff.
In connection with the Texas Utility Commission's industry-wide
investigation into potential manipulation of the ERCOT market on and after July
31, 2001, Reliant Energy and Reliant Resources have provided information to the
Texas Utility Commission concerning their scheduling and trading activities.
Fifteen class action lawsuits filed in May, June and July 2002 on behalf of
purchasers of securities of Reliant Resources and/or Reliant Energy have been
consolidated in federal district court in Houston. Reliant Resources and certain
of its executive officers are named as defendants. Reliant Energy is also named
as a defendant in seven of the lawsuits. Two of the lawsuits also name as
defendants the underwriters of the May 2001 initial public offering of
approximately 20% of the common stock of Reliant Resources (Reliant Resources
Offering). One lawsuit names Reliant Resources' and Reliant Energy's independent
auditors as a defendant. The consolidated amended complaint seeks monetary
relief purportedly on behalf of three classes: (1) purchasers of Reliant Energy
common stock from February 3, 2000 to May 13, 2002; (2) purchasers of Reliant
Resources common stock on the open market from May 1, 2001 to May 13, 2002; and
(3) purchasers of Reliant Resources common stock in the Reliant Resources
Offering or purchasers of shares that are traceable to the Reliant Resources
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 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 Reliant Resources 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 inflate artificially trading volumes and revenues. In
addition, the plaintiffs assert claims of fraudulent and negligent
misrepresentation and violations of Illinois consumer law. The defendants expect
to file a motion to transfer this lawsuit to the federal district court in
Houston and to consolidate this lawsuit with the consolidated lawsuits described
above.
The Company believes that none of these lawsuits has merit because, among
other reasons, the alleged misstatements and omissions were not material and did
not result in any damages to any of the plaintiffs.
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. Reliant Energy and its directors are named as
defendants in all of the lawsuits. Two of the lawsuits have been dismissed
without prejudice. The remaining 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. The plaintiffs allege that the defendants permitted the
plans to purchase or hold securities issued by Reliant Energy when it was
imprudent to do so, including after the prices for such securities became
artificially inflated because of alleged securities fraud engaged in by the
defendants. The complaints seek
29
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
monetary damages for losses suffered by a putative class of plan participants
whose accounts held Reliant Energy or Reliant Resources securities, as well as
equitable relief in the form of restitution.
In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of CenterPoint Energy. 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 CenterPoint Energy to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off and the Reliant
Resources Offering. The complaint seeks monetary damages on behalf of
CenterPoint Energy as well as equitable relief in the form of a constructive
trust on the compensation paid to the defendants. The defendants have filed a
motion to dismiss this case on the ground that the plaintiff did not make an
adequate demand on CenterPoint Energy before filing suit.
A Special Litigation Committee appointed by CenterPoint Energy's Board of
Directors is investigating similar allegations made in a June 28, 2002 demand
letter sent on behalf of a CenterPoint Energy shareholder. The letter states
that the shareholder and other shareholders are considering filing a derivative
suit on behalf of CenterPoint Energy and demands that CenterPoint Energy take
several actions in response to alleged round-trip trades occurring in 1999,
2000, and 2001. The Special Litigation Committee is reviewing the demands made
by the shareholder to determine if these proposed actions are in the best
interests of CenterPoint Energy.
Reliant Energy Municipal Franchise Fee Lawsuits. In February 1996, the
cities of Wharton, Galveston and Pasadena filed suit, for themselves and a
proposed class of all similarly situated cities in Reliant Energy's electric
service area, against Reliant Energy and Houston Industries Finance, Inc.
(formerly a wholly owned subsidiary of Reliant Energy) alleging underpayment of
municipal franchise fees. The plaintiffs claim that they are entitled to 4% of
all receipts of any kind for business conducted within these cities over the
previous four decades. A jury trial of the original claimant cities (but not the
class of cities) in the 269th Judicial District Court for Harris County, Texas,
ended in April 2000 (the Three Cities case). Although the jury found for Reliant
Energy on many issues, it found in favor of the original claimant cities on
three issues, and assessed a total of $4 million in actual and $30 million in
punitive damages. However, the jury also found in favor of Reliant Energy on the
affirmative defense of laches, a defense similar to a statute of limitations
defense, due to the original claimant cities having unreasonably delayed
bringing their claims during the 43 years since the alleged wrongs began. The
trial court in the Three Cities case granted most of Reliant Energy's motions to
disregard the jury's findings. The trial court's rulings reduced the judgment to
$1.7 million, including interest, plus an award of $13.7 million in legal fees.
In addition, the trial court granted Reliant Energy's motion to decertify the
class. Following this ruling, 45 cities filed individual suits against Reliant
Energy in the District Court of Harris County.
On February 27, 2003, the state court of appeals in Houston rendered an
opinion reversing the judgment against CenterPoint Energy 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
judgment of the court of appeals is subject to motions for rehearing and an
appeal to the Texas Supreme Court.
The extent to which issues in the Three Cities case may affect the claims
of the other cities served by Reliant Energy cannot be assessed until judgments
are final and no longer subject to appeal. However, the court of appeals' ruling
appears to be consistent with Texas Supreme Court opinions. The Company
estimates the range of possible outcomes for recovery by the plaintiffs in the
Three Cities case to be between $0 and $18 million inclusive of interest and
attorneys' fees.
30
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Matters
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.
(11) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents and short-term borrowings are
estimated to be equivalent to carrying amounts and have been excluded from the
table below.
<Table>
<Caption>
DECEMBER 31, 2001
-----------------
CARRYING FAIR
AMOUNT VALUE
-------- ------
(IN MILLIONS)
Financial liabilities:
Long-term debt (excluding capital leases)................. $3,361 $3,354
Trust preferred securities................................ 342 271
</Table>
<Table>
<Caption>
DECEMBER 31, 2002
-----------------
CARRYING FAIR
AMOUNT VALUE
-------- ------
(IN MILLIONS)
Financial liabilities:
Long-term debt (excluding capital leases)................. $3,742 $3,828
</Table>
(12) UNAUDITED QUARTERLY INFORMATION
Summarized quarterly financial data is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
Operating revenues.................................. $414 $565 $710 $411
Operating income.................................... 158 260 334 111
Income from continuing operations................... 78 137 187 44
Income from discontinued operations, net of tax..... 184 179 168 4
Net income.......................................... 262 316 355 47
</Table>
31
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2002
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
Operating revenues.................................. $ 568 $528 $660 $466
Operating income.................................... 254 275 399 168
Income from continuing operations................... 132 139 228 48
Income (loss) from discontinued operations, net of
tax............................................... (100) 97 135 --
Net income.......................................... 32 236 363 48
</Table>
32
INDEPENDENT AUDITORS' REPORT
To the Member of CenterPoint Energy Houston Electric, LLC and subsidiaries:
We have audited the accompanying consolidated balance sheets of CenterPoint
Energy Houston Electric, LLC (formerly Reliant Energy, Incorporated) and its
subsidiaries (CenterPoint Houston) as of December 31, 2001 and 2002, and the
related statements of consolidated income, consolidated comprehensive income,
consolidated stockholder's and member's equity and consolidated cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included CenterPoint Houston's financial statement schedule listed in Item
15(a)(2). These financial statements and the financial statement schedule are
the responsibility of CenterPoint Houston's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CenterPoint Houston at December
31, 2001 and 2002, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements,
CenterPoint Houston distributed its ownership interest in subsidiaries on August
31, 2002. The results of operations of these subsidiaries for periods prior to
the distribution are included in discontinued operations in the accompanying
consolidated financial statements.
DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2003
(May 15, 2003 as to the "Certain Reclassifications and Other Items" described in
Note 1)
33