EXHIBIT 99.1
ITEM 1A. RISK FACTORS
RISK FACTORS AFFECTING OUR BUSINESSES
RATE REGULATION OF OUR BUSINESS MAY DELAY OR DENY OUR ABILITY TO EARN A
REASONABLE RETURN AND FULLY RECOVER OUR COSTS.
Our rates for our local distribution companies are regulated by certain
municipalities and state commissions, and for our interstate pipelines by the
FERC, based on an analysis of our invested capital and our expenses in a test
year. Thus, the rates that we are allowed to charge may not match our expenses
at any given time. The regulatory process in which rates are determined may not
always result in rates that will produce full recovery of our costs and enable
us to earn a reasonable return on our invested capital.
OUR BUSINESSES MUST COMPETE WITH ALTERNATIVE ENERGY SOURCES, WHICH COULD LEAD
TO LESS NATURAL GAS BEING MARKETED, AND OUR PIPELINES AND FIELD SERVICES
BUSINESSES MUST COMPETE DIRECTLY WITH OTHERS IN THE TRANSPORTATION, STORAGE,
GATHERING, TREATING AND PROCESSING OF NATURAL GAS, WHICH COULD LEAD TO LOWER
PRICES, EITHER OF WHICH COULD HAVE AN ADVERSE IMPACT ON OUR RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.
We compete primarily with alternate energy sources such as electricity
and other fuel sources. In some areas, intrastate pipelines, other natural gas
distributors and marketers also compete directly with us for natural gas sales
to end-users. In addition, as a result of federal regulatory changes affecting
interstate pipelines, natural gas marketers operating on these pipelines may be
able to bypass our facilities and market, sell and/or transport natural gas
directly to commercial and industrial customers. Any reduction in the amount of
natural gas marketed, sold or transported by us as a result of competition may
have an adverse impact on our results of operations, financial condition and
cash flows.
Our two interstate pipelines and our gathering systems compete with
other interstate and intrastate pipelines and gathering systems in the
transportation and storage of natural gas. The principal elements of competition
are rates, terms of service, and flexibility and reliability of service. They
also compete indirectly with other forms of energy, including electricity, coal
and fuel oils. The primary competitive factor is price. The actions of our
competitors could lead to lower prices, which may have an adverse impact on our
results of operations, financial condition and cash flows.
OUR NATURAL GAS DISTRIBUTION AND COMPETITIVE NATURAL GAS SALES AND SERVICES
BUSINESSES ARE SUBJECT TO FLUCTUATIONS IN NATURAL GAS PRICING LEVELS, WHICH
COULD AFFECT THE ABILITY OF OUR SUPPLIERS AND CUSTOMERS TO MEET THEIR
OBLIGATIONS OR OTHERWISE ADVERSELY AFFECT OUR LIQUIDITY.
We are subject to risk associated with increases in the price of
natural gas, which has been the trend in recent years. Increases in natural gas
prices might affect our ability to collect balances due from our customers and,
on the regulated side, could create the potential for uncollectible accounts
expense to exceed the recoverable levels built into our tariff rates. In
addition, a sustained period of high natural gas prices could apply downward
demand pressure on natural gas consumption in the areas in which we operate and
increase the risk that our suppliers or customers fail or are unable to meet
their obligations. Additionally, increasing gas prices could create the need for
us to provide collateral in order to purchase gas.
IF WE WERE TO FAIL TO EXTEND A CONTRACT WITH ONE OF OUR SIGNIFICANT PIPELINE
CUSTOMERS, THERE COULD BE AN ADVERSE IMPACT ON OUR OPERATIONS.
Our contract with Laclede Gas Company, one of our pipeline's customers,
is currently scheduled to expire in 2007. To the extent the pipeline is unable
to extend this contract or the contract is renegotiated at rates substantially
less than the rates provided in the current contract, there could be an adverse
effect on our results of operations, financial condition and cash flows.
A DECLINE IN OUR CREDIT RATING COULD RESULT IN US HAVING TO PROVIDE COLLATERAL
IN ORDER TO PURCHASE GAS.
If our credit rating were to decline, we might be required to post cash
collateral in order to purchase natural gas. If a credit rating downgrade and
the resultant cash collateral requirement were to occur at a time when we were
experiencing significant working capital requirements or otherwise lacked
liquidity, we might be unable to obtain the necessary natural gas to meet our
obligations to customers, and our results of operations, financial condition and
cash flows would be adversely affected.
OUR PIPELINES' AND FIELD SERVICES' BUSINESS REVENUES AND RESULTS OF OPERATIONS
ARE SUBJECT TO FLUCTUATIONS IN THE SUPPLY OF GAS.
Our pipelines and field services business largely relies on gas sourced
in the various supply basins located in the Midcontinent region of the United
States. To the extent the availability of this supply is substantially reduced,
it could have an adverse effect on our results of operations, financial
condition and cash flows.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.
A substantial portion of our revenues is derived from natural gas sales
and transportation. Thus, our revenues and results of operations are subject to
seasonality, weather conditions and other changes in natural gas usage, with
revenues being higher during the winter months.
RISK FACTORS ASSOCIATED WITH OUR CONSOLIDATED FINANCIAL CONDITION
IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON ACCEPTABLE TERMS, OUR ABILITY
TO REFINANCE EXISTING INDEBTEDNESS COULD BE LIMITED.
As of December 31, 2005, we had $2 billion of outstanding indebtedness
on a consolidated basis. As of December 31, 2005, approximately $465 million
principal amount of this debt must be paid through 2008. Our future financing
activities may depend, at least in part, on:
- - general economic and capital market conditions;
- - credit availability from financial institutions and other lenders;
- - investor confidence in us and the market in which we operate;
- - maintenance of acceptable credit ratings;
- - market expectations regarding our future earnings and probable cash flows;
- - market perceptions of our ability to access capital markets on reasonable
terms; and
- - provisions of relevant tax and securities laws.
Our current credit ratings are discussed in "Management's Narrative
Analysis of Results of Operations -- Liquidity -- Impact on Liquidity of a
Downgrade in Credit Ratings" in Item 7 of this report. These credit ratings may
not remain in effect for any given period of time and one or more of these
ratings may be lowered or withdrawn entirely by a rating agency. We note that
these credit ratings are not recommendations to buy, sell or hold our
securities. Each rating should be evaluated independently of any other rating.
Any future reduction or withdrawal of one or more of our credit ratings could
have a material adverse impact on our ability to access capital on acceptable
terms.
THE FINANCIAL CONDITION AND LIQUIDITY OF OUR PARENT COMPANY COULD AFFECT OUR
ACCESS TO CAPITAL, OUR CREDIT STANDING AND OUR FINANCIAL CONDITION.
Our ratings and credit may be impacted by CenterPoint Energy's credit
standing. As of December 31, 2005, CenterPoint Energy and its other subsidiaries
have approximately $200 million principal amount of debt required to be paid
through 2008. This amount excludes amounts related to capital leases,
securitization debt and indexed debt securities obligations. In addition,
CenterPoint Energy has $830 million of outstanding convertible notes on which
holders could exercise their "put" rights during this period. We cannot assure
you that CenterPoint Energy and its other subsidiaries will be able to pay or
refinance these amounts. If CenterPoint Energy were to experience a
deterioration in its credit standing or liquidity difficulties, our access to
credit and our credit ratings could be adversely affected.
WE ARE AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY. CENTERPOINT
ENERGY CAN EXERCISE SUBSTANTIAL CONTROL OVER OUR DIVIDEND POLICY AND BUSINESS
AND OPERATIONS AND COULD DO SO IN A MANNER THAT IS ADVERSE TO OUR INTERESTS.
We are managed by officers and employees of CenterPoint Energy. Our
management will make determinations with respect to the following:
- - our payment of dividends;
- - decisions on our financings and our capital raising activities;
- - mergers or other business combinations; and
- - our acquisition or disposition of assets.
There are no contractual restrictions on our ability to pay dividends
to CenterPoint Energy. Our management could decide to increase our dividends to
CenterPoint Energy to support its cash needs. This could adversely affect our
liquidity. However, under our credit facility and our receivables facility, our
ability to pay dividends is restricted by a covenant that debt as a percentage
of total capitalization may not exceed 65%.
THE USE OF DERIVATIVE CONTRACTS BY US AND OUR SUBSIDIARIES IN THE NORMAL COURSE
OF BUSINESS COULD RESULT IN FINANCIAL LOSSES THAT NEGATIVELY IMPACT OUR RESULTS
OF OPERATIONS AND THOSE OF OUR SUBSIDIARIES.
We use derivative instruments, such as swaps, options, futures and forwards, to
manage our commodity and financial market risks. We could recognize financial
losses as a result of volatility in the market values of these contracts, or
should a counterparty fail to perform. In the absence of actively quoted market
prices and pricing information from external sources, the valuation of these
financial instruments can involve management's judgment or use of estimates. As
a result, changes in the underlying assumptions could affect the reported fair
value of these contracts.
RISKS COMMON TO OUR BUSINESSES AND OTHER RISKS WE ARE SUBJECT TO OPERATIONAL AND
FINANCIAL RISKS AND LIABILITIES ARISING FROM ENVIRONMENTAL LAWS AND REGULATIONS.
Our operations are subject to stringent and complex laws and
regulations pertaining to health, safety and the environment. As an owner or
operator of natural gas pipelines and distribution systems, gas gathering and
processing systems, and electric transmission and distribution systems we must
comply with these laws and regulations at the federal, state and local levels.
These laws and regulations can restrict or impact our business activities in
many ways, such as:
- - restricting the way we can handle or dispose of our wastes;
- - limiting or prohibiting construction activities in sensitive areas such as
wetlands, coastal regions, or areas inhabited by endangered species;
- - requiring remedial action to mitigate pollution conditions caused by our
operations, or attributable to former operations; and
- - enjoining the operations of facilities deemed in non-compliance with permits
issued pursuant to such environmental laws and regulations.
In order to comply with these requirements, we may need to spend
substantial amounts and devote other resources from time to time to:
- - construct or acquire new equipment;
- - acquire permits for facility operations;
- - modify or replace existing and proposed equipment; and
- - clean up or decommission waste disposal areas, fuel storage and management
facilities and other locations and facilities.
Failure to comply with these laws and regulations may trigger a variety
of administrative, civil and criminal enforcement measures, including the
assessment of monetary penalties, the imposition of remedial actions, and the
issuance of orders enjoining future operations. Certain environmental statutes
impose strict, joint and several liability for costs required to clean up and
restore sites where hazardous substances have been disposed or otherwise
released. Moreover, it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other waste products into the
environment.
OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT. INSUFFICIENT INSURANCE COVERAGE
AND INCREASED INSURANCE COSTS COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS,
FINANCIAL CONDITION AND CASH FLOWS.
We currently have general liability and property insurance in place to
cover certain of our facilities in amounts that we consider appropriate. Such
policies are subject to certain limits and deductibles and do not include
business interruption coverage. Insurance coverage may not be available in the
future at current costs or on commercially reasonable terms, and the insurance
proceeds received for any loss of, or any damage to, any of our facilities may
not be sufficient to restore the loss or damage without negative impact on our
results of operations, financial condition and cash flows.
WE AND CENTERPOINT ENERGY COULD INCUR LIABILITIES ASSOCIATED WITH BUSINESSES AND
ASSETS THAT WE HAVE TRANSFERRED TO OTHERS.
In connection with the organization and capitalization of RRI, RRI and
its subsidiaries assumed liabilities associated with various assets and
businesses Reliant Energy transferred to them. RRI also agreed to indemnify, and
cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy
and its subsidiaries, including us, with respect to liabilities associated with
the transferred assets and businesses. The indemnity provisions were intended to
place sole financial responsibility on RRI and its subsidiaries for all
liabilities associated with the current and historical businesses and operations
of RRI, regardless of the time those liabilities arose. If RRI is unable to
satisfy a liability that has been so assumed in circumstances in which Reliant
Energy has not been released from the liability in connection with the transfer,
we or CenterPoint Energy could be responsible for satisfying the liability.
Prior to CenterPoint Energy's distribution of its ownership in RRI to
its shareholders, we had guaranteed certain contractual obligations of what
became RRI's trading subsidiary. Under the terms of the separation agreement
between the companies, RRI agreed to extinguish all such guaranty obligations
prior to separation, but when separation occurred in September 2002, RRI had
been unable to extinguish all obligations. To secure CenterPoint Energy and us
against obligations under the remaining guarantees, RRI agreed to provide cash
or letters of credit for our benefit and that of CenterPoint Energy, and
undertook to use commercially reasonable efforts to extinguish the remaining
guarantees. Our current exposure under the remaining guarantees relates to our
guaranty of the payment by RRI of demand charges related to transportation
contracts with one counterparty. The demand charges are approximately $53
million per year in 2006 through 2015, $49 million in 2016, $38 million in 2017
and $13 million in 2018. As a result of changes in market conditions, our
potential exposure under that guaranty currently exceeds the security provided
by RRI. We have requested RRI to increase the amount of its existing letters of
credit or, in the alternative, to obtain a release of our obligations under the
guaranty, and we and RRI are pursuing alternatives. RRI continues to meet its
obligations under the transportation contracts.
RRI's unsecured debt ratings are currently below investment grade. If
RRI were unable to meet its obligations, it would need to consider, among
various options, restructuring under the bankruptcy laws, in which event RRI
might not honor its indemnification obligations and claims by RRI's creditors
might be made against us as its former owner.