File No. 070-9895
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1/A
POST-EFFECTIVE AMENDMENT NO. 1 TO
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
CenterPoint Energy, Inc.
1111 Louisiana
Houston, Texas 77002
Utility Holding, LLC
200 West Ninth Street Plaza
Suite 411
Wilmington, Delaware 19801
(Name of companies filing this statement and address of
principal executive offices)
CenterPoint Energy, Inc.
1111 Louisiana
Houston, Texas 77002
(Name of top registered holding company parent of each applicant or declarant)
Rufus S. Scott
Vice President, Deputy General Counsel and Assistant Corporate Secretary
CenterPoint Energy, Inc.
1111 Louisiana
Houston, Texas 77002
(713) 207-7451
(Names and addresses of agents for service)
The Commission is also requested to send copies
of any communications in connection with this matter to:
James R. Doty, Esq. Margo S. Scholin, Esq.
Joanne C. Rutkowski, Esq. Baker Botts L.L.P.
Baker Botts L.L.P. 3000 One Shell Plaza
The Warner Houston, Texas 77002-4995
1299 Pennsylvania Avenue, N.W. (713) 229-1234
Washington, D.C. 20004-2400
(202) 639-7700
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From time to time, we make statements concerning our
expectations, beliefs, plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements that are not
historical facts. These statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, within the
meaning of Rule 103A under the Public Utility Holding Company Act of 1935 or
other provisions of the securities laws. Actual results may differ materially
from those expressed or implied by these statements. The reader can generally
identify our forward-looking statements by the words "anticipate," "believe,"
"continue," "could," "estimate," "expect," "intend," "may," "plan," "potential,"
"predict," "should," "will," "forecast," "goal," "objective," "projection," or
other similar words.
We have based our forward-looking statements on our
management's beliefs and assumptions based on information available to our
management at the time the statements are made. We caution the reader that
assumptions, beliefs, expectations, intentions and projections about future
events may and often do vary materially from actual results. Therefore, we
cannot assure the reader that actual results will not differ materially from
those expressed or implied by our forward-looking statements.
The following list identifies some of the factors that could
cause actual results to differ materially from those expressed or implied by our
forward-looking statements:
o state, federal and international legislative and regulatory
actions or developments, including deregulation, re-regulation
and restructuring of the electric utility industry;
constraints placed on our activities or business by the Public
Utility Holding Company Act of 1935; changes in or application
of environmental, siting and other laws or regulations to
which we are subject; other aspects of our business and
actions with respect to:
o approval of stranded costs;
o allowed rates of return;
o rate structures;
o recovery of investments; and
o operation and construction of facilities;
o the effects of competition;
o industrial, commercial and residential growth in our service
territories and changes in market demand and demographic
patterns;
o changes in business strategy or development plans;
o state, federal and other rate regulations in the United
States;
o non-payment for our services due to financial distress of our
customers, including Reliant Resources, Inc;
o the successful and timely completion of our capital projects;
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o the timing and extent of changes in commodity prices,
particularly natural gas;
o changes in interest rates or rates of inflation; unanticipated
changes in operating expenses and capital expenditures;
o weather variations and other natural phenomena;
o commercial bank and financial market conditions, our access to
capital, the cost of such capital, receipt of certain
approvals under the Public Utility Holding Company Act of
1935, and the results of our financing and refinancing
efforts, including availability of funds in the debt capital
markets;
o actions by rating agencies;
o legal and administrative proceedings and settlements;
o changes in tax laws;
o inability of various counterparties to meet their obligations
with respect to our financial instruments;
o any lack of effectiveness of our disclosure controls and
procedures;
o changes in technology;
o significant changes in our relationship with our employees,
including the availability of qualified personnel and the
potential adverse effects if labor disputes or grievances were
to occur;
o significant changes in critical accounting policies material
to us;
o acts of terrorism or war, including any direct or indirect
effect on our business resulting from terrorist attacks such
as occurred on September 11, 2001 or any similar incidents or
responses to those incidents;
o the availability and price of insurance;
o the outcome of the pending securities lawsuits against Reliant
Energy, Incorporated and Reliant Resources, Inc.;
o the outcome of the SEC investigation relating to the treatment
in our consolidated financial statements of certain activities
of Reliant Resources, Inc;
o the ability of Reliant Resources, Inc. to satisfy its
indemnity obligations to us;
o the reliability of the systems, procedures and other
infrastructure territory, including the systems owned and
operated by the independent system operator in the Electric
Reliability Council of Texas, Inc.;
o political, legal, regulatory and economic conditions and
developments in the United States and in foreign countries in
which we operate; and
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o other factors we discuss in the Reliant Energy, Incorporated's
Annual Report on Form 10-K/A for the year ending December 31,
2001 (File No. 1-03187) CenterPoint Energy, Inc.'s Quarterly
Report on Form 10-Q for the period ending September 30, 2002
(File No. 1-31447), including those outlined in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Our Future Earnings"
and in this Form U-1/A.
The reader should not place undue reliance on forward-looking
statements. Each forward-looking statement speaks only as of the date of the
particular statement, and we undertake no obligation to publicly update or
revise any forward-looking statements.
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CenterPoint Energy, Inc. ("CenterPoint" or the "Company") and
Utility Holding, LLC are seeking a modification of the Commission's order dated
July 5, 2002 (HCAR No. 27548) (the "July Order") to permit CenterPoint to pledge
the stock of Texas Genco Holdings, Inc. ("Texas Genco") in connection with
refinancing of approximately $3.85 billion in CenterPoint debt.(1) CenterPoint
also seeks authority to issue warrants or other stock purchase rights, subject
to the terms and conditions of the July Order.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
A. REQUESTED AUTHORIZATION
The July Order authorized the formation of CenterPoint as a
registered holding company and approved various financing proposals. Among other
things, the July Order authorized CenterPoint to issue up to $5 billion in
long-term debt and $6 billion in short-term debt, subject to an overall limit of
no more than $6 billion in financings at any one time outstanding through June
30, 2003 (the "Authorization Period"). In the July Order, CenterPoint committed
that debt issued by it pursuant to such authorization would be unsecured.
In reliance on the authority granted in the July Order, on
October 10, 2002, CenterPoint entered into a $3.85 billion, 364-day credit
facility (the "CenterPoint Facility") to replace a similar facility that had
expired. The CenterPoint Facility requires, among other things, two mandatory
commitment reductions of $600 million, one by February 28, 2003, and the other
by June 30, 2003.
CenterPoint is facing significant financial pressures. The
management and Board of Directors of CenterPoint are working diligently to
preserve and enhance the value of the system. The recent credit crisis in the
energy sector has highlighted the importance of maintaining maximum flexibility
to raise capital from any source. Among other things, CenterPoint is negotiating
with its lenders to extend the maturity date of the CenterPoint Facility into
2005, by which time CenterPoint expects to have sold its generation assets and
recovered its stranded costs as provided by Texas law. Deteriorating market
conditions, however, have made it difficult to refinance CenterPoint's debt on
reasonable terms without providing some security. CenterPoint's lenders have
indicated that in the absence of flexibility to provide collateral to secure
borrowings, CenterPoint may find it difficult to obtain the necessary financing.
It is CenterPoint's belief that, with the ability to provide collateral, an
adequate financing arrangement could be implemented. Accordingly, CenterPoint is
seeking authorization pursuant to Sections 6 and 7 of the Act to issue and sell
during the Authorization Period up to $4 billion of debt that is partially
secured by the stock of Texas Genco, including
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(1) Utility Holding, LLC is a Delaware limited liability company and an
intermediate holding company that is registered under the Act. Utility Holding,
LLC, which directly holds approximately 80% of the outstanding common stock of
Texas Genco, is a necessary party to this filing. Utility Holding, LLC is
otherwise a conduit entity formed solely to minimize tax liability.
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the assets and securities of its indirect subsidiary company, Texas Genco, LP,
to the extent permitted by and consistent with contractual restrictions and
applicable law.
Texas Genco is an exempt holding company that indirectly owns
the Texas generation assets formerly owned by CenterPoint's integrated utility
predecessor (the "Texas Genco Assets"). Although the Commission has
traditionally discouraged the issuance of secured debt by a registered holding
company, CenterPoint believes that there are unique circumstances in this matter
that support the grant of the requested relief.
In the first instance, while Texas Genco, LP (the entity that
directly owns the Texas Genco Assets) is technically an "electric-utility
company" within the meaning of the Act, it has none of the indices of a
traditional regulated entity. Texas Genco, LP is solely an unregulated
generating company under Texas law. Its sales are not subject to traditional
cost-based rate regulation. It has no franchise or "obligation to serve" and has
no captive customers. Further, CenterPoint is in the process of obtaining the
necessary state approvals to allow Texas Genco to qualify as an exempt wholesale
generator, which is a nonutility company for purposes of the Act.
Second, it has always been CenterPoint's stated intention to
monetize the Texas Genco Assets (approximately $2.8 billion equity
capitalization as of September 30, 2002) as part of the Business Separation Plan
approved in December 2000 by the Public Utility Commission of Texas (the "Texas
Commission") pursuant to the Texas electric restructuring law. Indeed, in the
July Order, the Commission noted that "the sale of Texas Genco, LP and
securitization of any stranded investment in 2004 and 2005, as contemplated by
Texas law" are an integral part of CenterPoint's plan to achieve a more
traditional capital structure.
Third, CenterPoint does not expect to maintain secured debt at
the holding company level as a permanent part of its capital structure. At the
time it sells its stock in Texas Genco to Reliant Resources, Inc. ("Reliant
Resources") or a third party, it would need to redeem the pledge so that the
stock would be transferable. At that point it is contemplated that CenterPoint
would retire any secured debt at the parent level.(2)
As part of this approach, CenterPoint may be required to issue
debt securities convertible into common stock or debt securities with warrants
or other stock purchase rights. Again, the proceeds of such financing will be
used to refinance the existing indebtedness of CenterPoint. The July Order
grants CenterPoint the authority to issue convertible debt securities.
CenterPoint is seeking authority herein to issue options,
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(2) As explained more fully herein, Reliant Resources has an option
that may be exercised in January 2004 to acquire all of the shares of Texas
Genco common stock then owned by CenterPoint and Utility Holding, LLC.
CenterPoint is contractually obligated to deliver unencumbered shares of Texas
Genco stock. The documentation for any secured financing, therefore, would have
to provide for a release of all liens on the Texas Genco stock in connection
with the sale of that stock. As a result, any remaining debt under the
contemplated bank facility would cease to be secured.
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warrants to purchase the common stock of the Company or other stock purchase
rights consistent with Commission precedent and the terms and conditions of the
July Order.(3)
The proposed financings will otherwise be subject to the terms
and conditions as set forth in the Financing Order and as may be modified by the
Commission in this matter.(4)
The Company believes that the proposed transactions would
clearly place it in a stronger financial position than it is currently and so
the requested relief is consistent with the public interest and the interest of
investors and consumers. Compare Northeast Utilities, Holding Co. Act Release
No. 25273 (March 15, 1991) (while cautioning that it "cannot guarantee the
success of PSNH," the Commission nonetheless concluded that the proposed
transaction would place the company in a stronger financial position than it
would otherwise be).
B. BACKGROUND
1. Generally
In the July Order, the Commission authorized the formation of
a new registered holding company, CenterPoint, and the distribution
("Distribution") to shareholders of the remaining stock of Reliant Resources,
Inc. ("Reliant Resources"). The Distribution, which was made on September 30,
2002, completed the separation from CenterPoint of the merchant power generation
and energy trading and marketing business of Reliant Resources.(5)
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(3) If CenterPoint were to offer warrants or other stock purchase
rights to lenders, it is contemplated that the documentation would provide that,
upon exercise of such rights, (i) no one lender would own, control, or hold with
power to vote five percent or more of the outstanding common stock of
CenterPoint, and (ii) the lenders would not act as an organized group of persons
with respect to such voting stock or otherwise seek to exercise an impermissible
controlling influence over the management and operations of CenterPoint.
(4) It is anticipated that the term of the financing would be from
three to five years. The specific terms and conditions of the financing will be
determined in the course of negotiations with the lenders.
(5) As a result of the spin-off of Reliant Resources, CenterPoint
recorded a non-cash loss on the disposal of discontinued operations of $4.3
billion in the third quarter of 2002. This loss represents the excess of the
carrying value of CenterPoint's net investment in Reliant Resources over the
market value of Reliant Resources stock. To account for the Distribution,
CenterPoint reduced its retained earnings to reflect the impairment in the value
of its investment in Reliant Resources (i.e., the difference between book and
market value of the stock) and then reduced its additional paid-in capital by
the net book value of its investment (following the adjustment) in Reliant
Resources. The impairment
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CenterPoint's public-utility subsidiary companies own and
operate electric generation plants, electric transmission and distribution
facilities, natural gas distribution facilities and natural gas pipelines:
o CenterPoint Energy Houston Electric, LLC (the "T&D Utility") engages in the
electric transmission and distribution business in a 5,000-square mile area
of the Texas Gulf Coast that includes Houston.
o Texas Genco (discussed below) owns and operates the Texas generating plants
formerly belonging to the integrated electric utility that was a part of
Reliant Energy, Incorporated.
o CenterPoint Energy Resources Corp. ("GasCo") owns gas distribution systems
that together form one of the United States' largest natural gas
distribution operations in terms of customers served. Through
unincorporated divisions, GasCo provides natural gas distributions services
in Louisiana, Mississippi and Texas (Entex Division), Arkansas, Louisiana,
Oklahoma and Texas (Arkla Division) and Minnesota (Minnegasco Division).
Through wholly owned subsidiaries, GasCo owns two interstate natural gas
pipelines and gas gathering systems and provides various ancillary
services.
For the nine months ended September 30, 2002, CenterPoint had revenues of $5.8
billion, and operating income of $1.1 billion. As of September 30, 2002,
CenterPoint had assets totalling $19.0 billion.
2. The Texas Electric Restructuring Law
In June 1999, the Texas legislature enacted a law that
substantially amended the regulatory structure governing electric utilities in
Texas. Under this law, the power generation and retail sales functions of
integrated utilities in Texas ceased to be subject to traditional cost-based
regulation and utilities were required to separate their generation, retail and
transmission and distribution functions into separate units. Since January 1,
2002, Texas Genco has been selling generation capacity, energy and ancillary
adjustment was made in accordance with Accounting Principles Board Opinion No.
29, "Accounting for Nonmonetary Transactions" and Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
The impairment adjustment resulted in negative retained earnings for
CenterPoint. Subject to certain conditions, including a revaluation of all
assets and liabilities, generally accepted accounting principles ("GAAP") would
permit but do not require an accounting or quasi-reorganization to eliminate
deficits in retained earnings. See Financial Reporting Release 210.
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services to wholesale purchasers at prices determined by the market. The
transmission and distribution services provided by the T&D Utility remain
subject to rate regulation.
Since January 1, 2002, the former retail customers of most
investor-owned electric utilities in Texas have been entitled to purchase their
electricity from any of several "retail electric providers" that have been
certified by the Texas Commission. Retail electric providers cannot own
generation assets in Texas. Neither CenterPoint nor any of its subsidiary
companies is a retail electric provider or engages in retail electric sales.
Texas transmission and distribution utilities such as the T&D
Utility whose generation assets were "unbundled" pursuant to the Texas electric
restructuring law, may in 2004 recover generation-related (i) "regulatory
assets," and (ii) "stranded costs," which consist of the positive excess of the
net regulatory book value of generation assets over the market value of the
assets, taking specified factors into account.
As discussed herein, the Texas electric restructuring law
permits utilities to recover regulatory assets and stranded costs through
non-bypassable charges authorized by the Texas Commission, to the extent that
such assets and costs are established in certain regulatory proceedings. The law
also authorizes the Texas Commission to permit utilities to issue securitization
bonds based on the securitization of the revenue associated with that charge.
3. Texas Genco
Texas Genco, LP is one of the largest wholesale electric power
generating companies in the United States. As of September 30, 2002, Texas
Genco, LP owned and operated 11 power generating stations (60 generating units)
and had a 30.8% interest in the South Texas Project Electric Generating Station
("South Texas Project"), for a total net generating capacity of 14,175 MW. The
South Texas Project is a nuclear
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generating station with two 1,250 MW nuclear generating units. The following
table contains information regarding the electric generating assets:
NET GENERATING CAPACITY
AS OF
GENERATION FACILITIES SEPTEMBER 30, 2002 (IN MW)
W. A. Parish 3,661
Limestone 1,612
South Texas Project 770
San Jacinto 162
Cedar Bayou 2,260
P. H. Robinson 2,213
T. H. Wharton 1,254
S. R. Bertron 844
Greens Bayou 760
Webster 387
Deepwater 174
H. O. Clarke 78
Total 14,175
Texas Genco, LP sells electric generation capacity, energy and ancillary
services in the Electric Reliability Council of Texas, Inc. ("ERCOT") market,
which is the largest power market in the State of Texas. Since January 1, 2002,
Texas Genco, LP's generation business has been operated as an independent power
producer, with output sold at market prices to a variety of purchasers. As
authorized by this Commission under the July Order, on January 6, 2003,
CenterPoint distributed to its shareholders approximately 19% of the common
stock of Texas Genco. The stock of Texas Genco is traded on the New York Stock
Exchange under the symbol "TGN".
Reliant Resources has an option that may be exercised between
January 10, 2004 and January 24, 2004 to purchase all of the shares of Texas
Genco common stock then owned by CenterPoint. The exercise price under the
option will equal:
o the average daily closing price per share of Texas Genco common stock on
The New York Stock Exchange for the 30 consecutive trading days with the
highest average closing price for any 30-day trading period during the 120
trading days immediately preceding January 10, 2004, multiplied by the
number of shares of Texas Genco common stock then owned by CenterPoint,
plus
o a control premium, up to a maximum of 10%, to the extent a control premium
is included in the valuation determination made by the Texas Commission
relating to the market value of Texas Genco's common stock equity.
The exercise price formula is based upon the generation asset valuation
methodology in the Texas electric restructuring law that CenterPoint will use to
calculate the market value of Texas Genco. The exercise price is also subject to
adjustment based on the difference between the per share dividends Texas Genco
paid to CenterPoint during the period from the distribution date through the
option closing date and Texas Genco's actual per share earnings during that
period. To the extent Texas Genco's per share dividends are less than its actual
per share earnings during that period, the per share option price will be
increased. To the extent its per share dividends exceed its actual per share
earnings, the per share option price will be reduced.
Reliant Resources has agreed that if it exercises its option,
Reliant Resources will purchase from CenterPoint all notes and other payables
owed by Texas Genco to CenterPoint as of the option closing date, at their
principal amount plus accrued
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interest. Similarly, if there are notes or payables owed to Texas Genco by
CenterPoint as of the option closing date, Reliant Resources will assume those
obligations in exchange for a payment from CenterPoint of an amount equal to the
principal plus accrued interest.
If Reliant Resources does not exercise the option, CenterPoint
currently plans to sell or otherwise monetize its interest in Texas Genco.
4. Stranded Costs and Regulatory Assets Recovery
The Texas electric restructuring law provides CenterPoint an
opportunity to recover its "regulatory assets" and "stranded costs" resulting
from the unbundling of the transmission and distribution utility from the
generation facilities and the related onset of retail electric competition. The
Texas electric restructuring law allows alternative methods of third party
valuation of the fair market value of generation assets, including outright
sale, full and partial stock valuation and asset exchanges. CenterPoint has
committed in the business separation plan approved by the Texas Commission that
the fair market value of the Texas Genco Assets will be determined using the
partial stock valuation method. Under this methodology, the publicly traded
common stock of Texas Genco will be used to determine the market value of the
Texas Genco Assets.
Beginning in January 2004, the Texas Commission will conduct
true-up proceedings for each investor-owned utility. 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 and other regulatory assets
associated with the generating assets that were not previously securitized. The
true-up proceeding will result in either additional charges or credits being
assessed on certain retail electric providers.
The regulatory net book value of generating assets will be
compared to the market value based on the partial stock valuation method. The
resulting difference, if positive, is stranded cost that will be recovered
through a transition charge, which is a non-bypassable charge assessed to
customers taking delivery service from the T&D Utility, that may be securitized
as discussed below. If the difference is negative, the amount of over-mitigation
not returned to customers by that time (redirected depreciation and excess
earnings directed to depreciation) will be returned to customers through lower
transmission and distribution charges.
The publicly traded common stock of Texas Genco will be used
to determine the market value of the Texas Genco Assets. The market value will
be equal to the average daily closing price on a national exchange for publicly
held shares of common stock in Texas Genco for the 30 consecutive trading days
chosen by the Texas Commission out of the 120 trading days immediately preceding
the true-up filing, plus a control premium, up to a maximum of 10%. The
regulatory net book value is the balance as of December 31, 2001 plus certain
costs incurred for reductions in emissions of oxides of nitrogen and any
above-market purchase power costs. The regulatory net book value will also
include any mitigation returned to ratepayers through return of "excess earnings
depreciation" or reversal of redirected depreciation.
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The Texas Commission used a computer model or projection,
called an excess-cost-over-market model or "ECOM model," to estimate stranded
costs related to generation plant assets. In connection with using the ECOM
model to calculate the stranded cost estimate, the Texas Commission estimated
the market power prices that will be received in the generation capacity
auctions mandated by the Texas electric restructuring law during the period
January 1, 2002 through December 31, 2003. Any difference between the actual
market power prices received in those auctions and the Texas Commission's
earlier estimates of those market prices will be a component of the 2004 true-up
to which the T&D Utility will be a party.
The fuel component will be determined in a final fuel
reconciliation. In that proceeding, the amount of any over- or under-recovery of
fuel costs from the period August 1, 1997 through January 31, 2002 will be
determined. Any over- or under-recovery, plus interest thereon, will either be
returned to or recovered from our customers, as appropriate, as a component of
the 2004 true-up.
In connection with the implementation of the Texas electric
restructuring law, the Texas Commission has set a "price to beat" for retail
electric providers affiliated with a formerly integrated utility that serve
residential and small commercial customers within the utility's service
territory. The true-up provides for a clawback of "price to beat" in excess of
the market price of electricity if 40% of the "price to beat" load is not served
by a non-affiliated retail electric provider by January 1, 2004. Pursuant to the
master separation agreement between Reliant Energy, Incorporated and Reliant
Resources, Reliant Resources is obligated to reimburse the T&D Utility for the
clawback component of the true-up. The clawback will not exceed $150 times the
number of customers served by the affiliated retail electric provider in the
transmission and distribution utility's service territory less the number of
customers served by the affiliated retail electric provider outside the
transmission and distribution utility's service territory on January 1, 2004.
The Texas electric restructuring law provides for the use of
special purpose entities to issue securitization bonds for the economic value of
generation-related regulatory assets and stranded costs. These bonds will be
amortized through non-bypassable charges to the T&D Utility's customers that are
authorized by the Texas Commission. Any stranded costs not recovered through the
securitization bonds will be recovered through a non-bypassable charge assessed
to customers taking delivery service from the T&D Utility.
In October 2001, one of CenterPoint's subsidiaries issued $749
million of transition bonds to securitize generation-related regulatory assets.
The bonds have a final maturity date of September 15, 2015 and are non-recourse
to CenterPoint or its subsidiaries other than to the special purpose issuer of
the transition bonds. The T&D Utility 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 T&D
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Utility and the transition bond company and in an intercreditor agreement among
the T&D Utility, its transition bond subsidiary and other parties.
It is anticipated that a subsidiary of the T&D Utility will
similarly issue securitization bonds in 2004 or 2005 to monetize and recover the
balance of stranded costs relating to previously owned electric generation
assets and other qualified costs as determined in the 2004 true-up proceeding.
The issuance will be done pursuant to a financing order issued by the Texas
Commission. As with the debt of its existing transition bond company, the
holders of the securitization bonds would not have recourse to any of
CenterPoint's assets or revenues, nor would the system's creditors have recourse
to any assets or revenues of the entity issuing the securitization bonds. All or
a portion of the proceeds from the issuance of bonds would be used to repay
system debt.
5. Financial Condition
a. CenterPoint now projects that it will achieve 30%
common equity capitalization (net of securitization
debt) in 2007.
At the time the Commission issued the July Order, it was
contemplated that, by the end of 2005, the consolidated equity capitalization
(net of securitization debt) of the CenterPoint system would meet or exceed the
30% minimum generally required by the Commission for registered holding
companies (the "June 2002 projections"). The Company's most recent projections
indicate that the 30% goal will indeed be achieved but over a longer period of
time. Specifically, CenterPoint now projects that the system's equity
capitalization will reach 30% in 2007 and continue to increase thereafter (the
"January 2003 projections").(6)
The difference between the June 2002 projections and the
January 2003 projections is largely a result of two factors: (i) increased
interest expenses and (ii) anticipated charges to Other Comprehensive Income
related to declines in the market value of the CenterPoint pension plan's assets
and the settlement of certain long-term interest rate swaps.(7)
Interest Expense
At the time the Commission issued the July Order, CenterPoint
and the T&D Utility were facing the imminent maturity of $4.7 billion in bank
facilities. Those facilities had been put in place in July 2001 as interim
facilities for a one-year term. At
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(6) This change affects only CenterPoint. As reflected in the July
Order, the common equity percentage of each of Texas Genco LP, the T&D Utility
and GasCo will remain in excess of 30% through the Authorization Period.
(7) In its Form 10-Q for the period ending September 30, 2002,
CenterPoint stated that: "increased borrowing costs and increased pension
expense are expected to negatively impact our earnings in 2003."
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that time, it was contemplated that the Company would complete its restructuring
by the end of 2001. Both the Company and its financial advisors believed that
the Company should wait until it had completed its restructuring and the
Distribution of its unregulated businesses before seeking to refinance its short
term debt in the capital markets. It was thought that CenterPoint as a "pure"
regulated business would be able to attract lower cost capital and more
favorable terms than it could if it were financing as a combination of regulated
and more volatile unregulated businesses.
Largely as a result of external events, including issues
involving Reliant Resources, the Company was not able to complete the separation
of its regulated and unregulated businesses and access the capital markets
before the $4.7 billion interim bank facilities expired in July 2002. Following
the collapse of Enron in late 2001, the financial markets had deteriorated for
utilities in general and for CenterPoint in particular, with its association
with Reliant Resources and the uncertainty surrounding that company. Thus when
the bank facilities were being renewed in July 2002, the bankers were willing to
grant only a 90-day extension to October 2002. During that 90-day period,
CenterPoint was again thwarted in efforts to issue public debt by the discovery
of yet another accounting problem at Reliant Resources. As explained in the
Company's Quarterly Report on Form 10-Q, in September 2002, Reliant Resources
identified four natural gas financial transactions that should not have been
reflected in its financial statements. Although it was ultimately concluded that
no restatement of financial statements was required, the pendency of this issue
made it impossible for CenterPoint and its subsidiary companies to issue public
debt during this period.
As a result, when the extension expired in October 2002,
CenterPoint and the T&D Utility had no real alternatives to extending the bank
debt. In the interim, from July to October 2002, conditions in the financial
markets had further deteriorated. The terms and conditions on which debt could
be obtained had grown more onerous and lenders were increasingly insistent on
receiving security for the funds they advanced.
On October 11, 2002, CenterPoint announced that it had
successfully negotiated new, one-year credit facilities totaling $4.7 billion
with a syndicate of 30 banks. The $4.7 billion agreement was composed of two
separate credit facilities. The first is the $3.85 billion, 364-day bank credit
facility at CenterPoint. Pricing under the CenterPoint Facility is based on
LIBOR rates under a pricing grid tied to the company's credit rating. Interest
rates for the term loans at CenterPoint's current ratings would be the LIBOR
rate plus 450 basis points, an increase of 150 basis points over the prior
facility agreement.(8)
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(8) The facility contains various business and financial covenants.
CenterPoint is currently in compliance with the covenants under the applicable
credit agreements.
Under the CenterPoint Facility, if any capital stock or indebtedness is issued,
proceeds are to be applied (subject to a $100 million basket, and other limited
exceptions) to repay bank loans and reduce bank commitments. If CenterPoint
receives cash proceeds from a sale of assets of more than $30 million or, if
less, a group of sales aggregating more than $100 million, then such proceeds
are to be applied to prepay bank loans and to reduce bank commitments, except
that proceeds of up to $120 million (including the $100 million basket discussed
above) can be reinvested in CenterPoint's businesses.
Page 13
The second facility, at the T&D Utility, was an $850 million,
364-day bank credit facility. Interest rates for a term loan under that facility
were LIBOR plus 300 basis points for $400 million and 350 basis points for the
next $450 million, an increase of 50 and 100 basis points, respectively. Loans
under the facility were secured by General Mortgage Bonds.
As part of these agreements, CenterPoint agreed to pay a one
percent fee upon closing, an additional one percent on November 15, 2002, $50
million at the end of February 2003, and $25 million at the end of June 2003. In
addition, the banks insisted on prepayments of a portion of the principal. On
the CenterPoint Facility, the banks required two $600 million prepayments, one
by February 28, 2003, and the second by June 30, 2003. A $450 million prepayment
was to have been required in March on the $850 million bank facility at the T&D
Utility. And perhaps most significantly, the banks insisted that CenterPoint
and/or the T&D Utility obtain $400 million in new borrowing by November 15,
2002, to pay other indebtedness that would come due then. Failure to obtain this
additional borrowing would have enabled the banks to terminate the loans as of
November 15.
On November 12, 2002, the T&D Utility entered into a new
$1.310 billion senior secured credit facility, which removed the immediate
acceleration requirement contained in the October $4.7 billion bank credit
facilities (the "T&D Term Loan"). The proceeds were used to repay all amounts
outstanding under the T&D Utility's existing $850 million bank credit facility
dated October 10, 2002, to repay $400 million of debt, which included $300
million of senior debentures of CenterPoint Energy FinanceCo II LLP due to
mature on November 15, 2002, and $100 million of debt of CenterPoint, and to pay
fees and related expenses. The T&D Term Loan has a three-year term, and carries
an interest rate of LIBOR plus 9.75 percent, subject to a minimum LIBOR rate of
3 percent.(9) The T&D Utility Term Loan is secured by General Mortgage Bonds,
which replaced the $850 million in General Mortgage Bonds that the banks had
held.
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(9) Although significantly higher than previous rates, the interest
rates under the T&D Facility are comparable to those approved by the Commission
during this period for a subsidiary of Allegheny Energy, Inc., another
registered holding company. See Allegheny Energy, Inc., Holding Co. Act Release
No. 27259 (Oct. 17, 2002) ("the effective cost of capital on any security will
not exceed competitive market rates available at the time of issuance for
securities having the same or reasonably similar terms and conditions issued by
similar companies of reasonably comparable credit quality, provided that in no
event will the interest rate on any such secured debt exceed an interest rate
per annum equal to the sum of 12% plus the prime rate as announced by a
nationally recognized money center bank").
Page 14
Other Comprehensive Income
Pension Plan Funding. CenterPoint makes contributions to
achieve adequate funding of company sponsored pension and postretirement
benefits in accordance with applicable regulations and rate orders. Due to the
decline in current market value of the pension plan's assets, the value of the
plan's assets is less than the Company's accumulated pension benefit obligation.
In its Form 10-Q for the period ending September 30, 2002, CenterPoint explained
that it might be required to record a non-cash minimum pension liability
adjustment to other comprehensive income during the fourth quarter of 2002,
which could be material. Recording a minimum liability adjustment will not
affect CenterPoint's results of operations during 2002 or its ability to meet
any existing financial covenants related to its debt facilities. Additionally,
the Company is not required to make any pension contribution in 2002 and 2003.
Interest Rate Swaps. During the three months ended September
30, 2002, the Company settled its forward-starting interest rate swaps having an
aggregate notional amount of $1.5 billion at a cost of $156 million, which was
recorded in other comprehensive income and will be amortized into interest
expense in the same period during which the forecasted interest payments affect
earnings. Should the forecasted interest payments no longer be probable, any
remaining deferred amount will be recognized immediately as an expense.
b. The Company is engaged in ongoing efforts to improve
its credit profile, strengthen its balance sheet and
position the system for improved long-term financial
performance.
Like other companies in the industry, CenterPoint is
undertaking various initiatives to strengthen its financial profile in an effort
to deliver long-term sustainable value for its shareholders.
In connection with the Distribution of Reliant Resources,
CenterPoint effectively exited from nonregulated businesses and the risks
associated therewith. As discussed in connection with the July Order, the
Company is strictly limiting its capital expenditures in the next three years to
those necessary to maintain the integrity of the physical plant and ensure the
continued provision of quality service to its customers. The CenterPoint
system's liquidity and capital requirements are affected primarily by results of
operations, capital expenditures, debt service requirements, and working capital
needs. The largest component of estimated construction expenditures are
additions to the system's electric distribution network arising from estimated
load growth comprising approximately $125 million per year over the next five
years.
CenterPoint also reduced its dividend in connection with the
Distribution to a level commensurate with the size of the remaining regulated
company. Further, as
Page 15
discussed in connection with the July Order, CenterPoint continues to centralize
many of the activities and administrative functions of the gas and electric
utility operations. CenterPoint continues to reduce costs in its various
business units, by reducing inventory and consolidating functions. CenterPoint
is also undergoing a series of work force reductions. Recently, the Company
established a Process Improvement Office to identify and implement cost-saving
measures, which is expected to result in significant savings.
In addition to these ongoing measures, in October 2002, Texas
Genco announced a plan to temporarily remove from service, or "mothball,"
approximately 3,400 MW of gas-fired generating units through at least May 2003.
The Company decided to mothball these units because of unfavorable market
conditions in the ERCOT market, including a surplus of generating capacity and a
lack of bids for the output of these units in previous capacity auctions. In so
doing, the Company minimized the operating and maintenance expenses associated
with these units representing approximately one third of Texas Genco's total
gas-fired generating capacity.(10) Given the results of recent capacity
auctions, the Company expect to return some or all of the mothballed facilities
to service during the summer.
The most important consideration in this regard - and the way
in which CenterPoint differs from other systems - is the regulatory assurance
provided by the Texas restructuring law. While the measures described above are
both necessary and appropriate, it is the sale of Texas Genco and securitization
of stranded investment in 2004 and 2005 that will ultimately help CenterPoint to
achieve a more traditional capital structure.
c. The Company must surmount the immediate challenges.
As a result of the November financing, the system successfully
met the first deadline under the October facilities and so avoided an immediate
liquidity crisis. CenterPoint, however, is now faced with the need to raise $600
million by February 28, 2003 and an additional $600 million by June 30 to
satisfy the prepayment obligations under the $3.85 billion CenterPoint Facility
unless it is able to renegotiate the terms of that facility.
The Company's heavy reliance on bank financing has created a
recurring need to extend short-term maturities. The process is time-consuming
and costly. The unanimous consent of the thirty banks in the current consortium
is required for any extension or modification of the CenterPoint Facility.
Notwithstanding the long-term viability of the Company, problems in the sector
generally are reflected in more onerous terms and conditions for CenterPoint.
Indeed, the cost and difficulty of obtaining the October 2002 extension have
caused CenterPoint to pursue the instant financing transactions as a means of
avoiding the repeated need for bank extensions.
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(10) In connection with the decision to mothball these units, Texas Genco
extended a voluntary early retirement package in November 2002 to approximately
140 Texas Genco employees.
Page 16
Moody's Investors Service, Inc. ("Moody's") has rated the
senior unsecured debt of CenterPoint Ba1 with a negative outlook.(11) Standard &
Poor's, a division of The McGraw Hill Companies ("S&P") and Fitch, Inc.
("Fitch") have each assigned it a rating of BBB- with a negative CreditWatch or
outlook.(12)
Concerns about short-term liquidity prompted Moody's on
November 4, 2002 to lower from Baa2 to Ba1 the senior unsecured ratings assigned
to CenterPoint:
The downgrades reflect the limited financial flexibility
experienced by the holding company given delays in
spinning-off its 80% owned subsidiary, Reliant Resources, Inc.
(RRI, Ba3) which it finally accomplished September 30th. RRI
related challenges have constrained CenterPoint Energy's
access to capital markets and as a result, the company
implemented new credit facilities on October 10 which Moody's
believes contain onerous terms.
* * *
The negative outlook at CenterPoint Energy reflects near term
liquidity challenges in the mandatory commitment reductions
required in the bank financing. . . . A return to stable
outlooks . . . will depend on the company's ability to resolve
its near term liquidity challenges.
Press release issued November 4, 2002.
S&P, in contrast, has focused on CenterPoint's
creditworthiness beyond the current period and therefore has maintained
investment grade ratings for CenterPoint, notwithstanding the Company's
near-term challenges. In an article dated December 4, 2002, S&P cites what it
characterizes as the "virtual certainty" that the legal path contemplated by the
Texas restructuring law will be followed to enable CenterPoint to recover the
stranded costs associated with its generation:
On a consolidated basis, CenterPoint Energy, Inc.
(CenterPoint; BBB/Watch Neg/A-2) has a substantial amount of
debt; debt leverage was about 83% at Sept. 30, 2002 (excluding
transition bonds). However, investors
----------
(11) A "negative" outlook from Moody's reflects concerns over the next
12 to 18 months which will either lead to a review for a potential downgrade or
a return to a stable outlook.
(12) S&P's CreditWatch "negative" indicates a potential for a downgrade
within a relatively short period of time usually related to a specific event. A
"negative" outlook from Fitch encompasses a one- to two-year horizon as to the
likely rating direction.
Page 17
should recognize that this capital structure is by design, and
temporary. In accordance with the Texas Electric Restructuring
Law, which deregulated the state's electricity system,
CenterPoint will sell its wholly owned Texas Genco subsidiary,
and use the proceeds to pay down debt. In addition, regulatory
assets accrued from mid-1998 through January 2004 will be
factored into the calculation of recoverable costs related to
generation (stranded costs). CenterPoint expects to receive in
excess of $5 billion, which will be applied to the paydown of
debt during 2004 and 2005. Thus, by 2006, debt is expected to
account for between 55% and 60% of total capital.
CenterPoint's 'BBB' rating reflects Standard & Poor's extended
view of the company's creditworthiness beyond this current
period of weak financials, given the virtual certainty the
legal path will be followed to this outcome. Standard & Poor's
believes the potential for a change in legislation to be
highly unlikely, and furthermore, believes that the
legislation provides specific guidance as to how CenterPoint
will be compensated for its generation investment.
"CenterPoint Energy Sees Light at the End of the Tunnel," Standard & Poor's
Utilities and Perspective for the week of December 2, 2002. While acknowledging
the significant hurdles faced by CenterPoint in the next twelve months -
"CenterPoint will need to either secure additional financing or renegotiate the
terms of its current bank facility as a prerequisite for financial health" --
the S&P article concludes that "CenterPoint will emerge as a low-risk
electricity and gas distribution company, with solid financial parameters."
As the Company has argued throughout the restructuring
process, the CenterPoint system is a fundamentally sound utility system without
many of the risks associated with unregulated generation and trading businesses.
As restructured, it no longer has the generation supply obligations and risks
traditionally associated with electric utilities. At the same time, the
restructuring process dictated by the Texas electric restructuring law and the
transition to competition impose constraints and delay in the determination and
recovery of stranded costs. That process significantly complicates the Company's
current financial condition and limits its flexibility in addressing certain
issues until 2004 and 2005. Overlaying those complications is the difficult
financial market now and the particular concerns in the market about the energy
sector. These factors combine to place unique pressures on the Company's
financing and its options. Yet it is important to keep in mind that CenterPoint
is a company with a clear path to achieving a financial condition more in
keeping with that traditionally associated with public utility holding
companies.
Page 18
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred,
directly or indirectly, in connection with the Application are estimated to be
$20,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
Sections 6(a), 7, 32 and 33 of the Act and Rules 44, 53 and 54
are considered applicable to the proposed transactions. To the extent that the
proposed transaction is considered by the Commission to require authorization,
exemption or approval under any section of the Act or the rules and regulations
other than those set forth above, request for such authorization, exemption or
approval is hereby made.
1. Generally
CenterPoint is requesting authority to issue secured debt upon
the terms described herein. The Company is also seeking approval to issue
options, warrants to purchase the common stock of the Company or other stock
purchase rights consistent with Commission precedent.(13) The Company believes
that such authorization would help to provide access to the capital markets on
acceptable terms and assure the liquidity that is needed to enable CenterPoint
to satisfy its ongoing obligations.
The request to issue secured debt is consistent with, and
modeled on, the recent authorization granted Allegheny Energy Supply Company,
LLC, a registered holding company, to issue debt secured by, among other things,
the utility assets and securities of public-utility companies held by it.
Allegheny Energy, Inc., Holding Co. Act Release No. 27579 (Oct. 17, 2002). In
that matter, as in the instant one, the subject public-utility subsidiary
companies were engaged in the generation and sale of electricity at wholesale.
There were, and are, no captive retail customers. As with Allegheny, the
proceeds of the financing will be used to refinance existing indebtedness of the
registered holding company, and finance the business of the holding company and
its subsidiaries. Again, as in Allegheny, the requested authority is required to
meet short-term liquidity needs, "including payment of obligations arising in
the operation of [the applicants'] businesses and the refinancing of
borrowings." Allegheny Energy, Inc., Post-Effective Amendment No. 6 in File No.
70-9897 (Oct. 9, 2002).
Any borrowings secured by Texas Genco stock would have a
priority over CenterPoint's unsecured creditors to the extent of those assets.
Applicants believe that
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(13) See National Fuel Gas Co., Holding Co. Act Release No. 27600 (Nov.
12, 2002) (authorizing the issuance of options and warrants exercisable for
common stock): Pepco Holdings, Inc., Holding Co. Act Release No. 27557 (July 31,
2002) (options, warrants or stock purchase rights exercisable for common stock);
E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002) (options, warrants or
stock purchase rights); Allegheny Energy, Inc., Holding Co. Act Release No.
27521 (April 17, 2002) (options, warrants, stock purchase rights or contracts to
purchase common stock).
Page 19
the value of the security together with that of CenterPoint's other unencumbered
assets exceed the amount of CenterPoint's total indebtedness and other
liabilities and that the granting of a security interest in the Texas Genco
stock to certain creditors would not prevent the full payment of other
CenterPoint creditors. All such creditors would have to be paid in full before
value is made available to shareholders in any bankruptcy or liquidation of
CenterPoint.
CenterPoint expects to use the authorization requested herein
in connection with the refinancing of its existing bank borrowings. Any secured
financings will otherwise comply with the terms and conditions set forth in the
July Order.
It is appropriate and necessary under the circumstances that
CenterPoint issue debt secured by a pledge of the Texas Genco stock.(14)
CenterPoint proposes to issue secured debt, as described herein, to meet the
urgent and necessary cash requirements of the CenterPoint system. The proposed
secured financing is an appropriate financing source for CenterPoint to finance
its capital expenditures and operating expenses. CenterPoint has explored
various options available to provide the funding required by the system and
believes that, given current market conditions, the proposed transactions are
the most viable and efficient approach for meeting CenterPoint's refinancing
obligations.
Market conditions have foreclosed certain other options. For
example, it was originally intended that by year-end 2002 CenterPoint would
conduct an initial public offering of approximately 20% of the common stock of
Texas Genco, as a means of establishing market value for purposes of determining
stranded costs. CenterPoint's financial advisors advised the Company that it
would not be feasible to proceed with the planned offering under current market
conditions, and so the Company instead distributed about 19% of the stock of
Texas Genco to shareholders as a means of establishing the value of its
generating assets for purposes of determining stranded costs. Unlike a public
offering, however, the distribution did not result in proceeds that could be
used to pay down debt.
Market conditions have also largely foreclosed the ability of
CenterPoint to issue additional unsecured debt on reasonable terms. CenterPoint
has explored various options available to provide the necessary funding and has
been advised by its financial advisors and by prospective lenders that, given
current market conditions, the Company will be required to provide collateral to
secure the debt in order to obtain such funds on reasonable terms. The proposed
financings are the most economical and efficient manner to finance the immediate
liquidity needs of CenterPoint and its subsidiary companies.
Furthermore, as reflected in the financial information
provided in this record, the proposed refinancing financings do not impose an
unreasonable financial burden on CenterPoint. The transactions represent a
reasonable course of action for the operation of CenterPoint's business, and are
appropriate for the protection of investors
----------
(14) The debt will not be secured by any securities or utility assets
of the T&D Utility or GasCo, the operating utility subsidiaries of CenterPoint.
Page 20
and consumers. CenterPoint further submits that the applicable provisions of the
Act are satisfied and that no adverse findings are warranted.
2. Rule 54 Analysis
Rule 54 provides that in determining whether to approve
certain transactions other than those involving "exempt wholesale generators",
as defined in Section 32 of the Act ("EWGs"), and "foreign utility companies",
as defined in Section 33 of the Act ("FUCOs"), the Commission will not consider
the effect of the capitalization or earnings of any subsidiary which is an EWG
or FUCO if Rule 53(a), (b) and (c) are satisfied.
As a result of the Restructuring authorized in the July Order
(as such term is defined in the July Order), CenterPoint had negative retained
earnings as of September 30, 2002. Thus, although CenterPoint's aggregate
investment (as defined in Rule 53(a)(1)(i)), in EWGs and FUCOs as of September
30, 2002 was approximately $8 million, the Company is not currently in
compliance with the requirements of Rule 53(a)(1). As previously explained,
CenterPoint is attempting to dispose of its remaining interests in EWGs and
FUCOs.
CenterPoint complies with, and will continue to comply with,
the record-keeping requirements of Rule 53(a)(2), the limitation under Rule
53(a)(3) on the use of domestic public-utility company personnel to render
services to EWGs and FUCOs, and the requirements of Rule 53(a)(4) concerning the
submission of copies of certain filings under the Act to retail regulatory
commissions. Further, none of the circumstances described in Rule 53(b) has
occurred or is continuing. Rule 53(c) is by its terms inapplicable to the
transactions proposed herein that do not involve the issue and sale of
securities (including guarantees) to finance an acquisition of an EWG or FUCO.
ITEM 4. REGULATORY APPROVALS
No state or federal commission other than the Commission has
jurisdiction with respect to any of the proposed transactions described in this
Post-Effective Amendment No. 1 to Application-Declaration.
ITEM 5. PROCEDURE
The Applicants respectfully request that the Commission issue
its Order as quickly as possible but in no event later than February 14, 2003.
The Applicants hereby waive a recommended decision by a
hearing officer of the Commission and agree that the Division of Investment
Management may assist in the preparation of the decision of the Commission.
Page 21
EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
Exhibit H-1 Draft Notice
Financial Statements
FS-6 Statements of Consolidated Operations for Three and Nine
Months Ended September 30, 2001 and 2002 (unaudited) for
CenterPoint Energy, Inc. and Subsidiaries (incorporated by
reference to CenterPoint's Form 10-Q for the quarterly period
ended September 30, 2002, File No. 1-31447)
FS-7 Consolidated Balance Sheets for Nine Months Ended September
30, 2001 and 2002 (unaudited) for CenterPoint Energy, Inc. and
Subsidiaries (incorporated by reference to CenterPoint's Form
10-Q for the quarterly period ended September 30, 2002, File
No. 1-31447)
INFORMATION AS TO ENVIRONMENTAL EFFECTS
The proposed financing transaction neither involves a "major
federal action" nor "significantly affects the quality of the human
environment," as those terms are used in Section 102(2)(c) of the National
Environmental Policy Act. Consummation of the proposed transaction will not
result in changes in the operations of the parties that would have any impact on
the environment. No federal agency is preparing an Environmental Impact
Statement with respect to this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, as amended, the Applicants have duly caused this
Application/Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
Date: January 27, 2003
CENTERPOINT ENERGY, INC.
and its subsidiary companies as named on the title page
By: /s/ Rufus S. Scott
----------------------------------------------------
Rufus S. Scott
Vice President, Deputy General Counsel and Assistant Corporate Secretary
CenterPoint Energy, Inc.
Page 22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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Exhibit H-1 Draft Notice