File No. 070-9895
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1/A
POST-EFFECTIVE AMENDMENT NO. 4 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, CenterPoint Energy, Inc. and its
subsidiaries 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 and federal legislative and regulatory actions or
developments, including deregulation, re-regulation and
restructuring of the electric utility industry; constraints
placed on our activities or business by the Public Utility
Holding Company Act of 1935; 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;
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 us and
Reliant Energy, Incorporated;
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 CenterPoint Energy, Inc.'s Annual
Report on Form 10-K for the period ending December 31, 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, subject to the terms and conditions of
the July Order.
This Post-Effective Amendment No. 4 to the
Application-Declaration restates Post-Effective Amendment No. 3 to the
Application-Declaration in its entirety.
ITEM 1. DESCRIPTION OF TRANSACTION
A. The CenterPoint Facility
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 (the
"Financing Limit") 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.
Pursuant to 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 required, among other things, two mandatory
commitment reductions of $600 million, one by February 28, 2003, and the other
by June 30, 2003.
On February 28, 2003, CenterPoint reached agreement with a
syndicate of banks on a second amendment to the CenterPoint Facility (the
"Second Amendment"). The Second Amendment provides significant improvements for
CenterPoint and has enhanced its access to the capital markets:
o The maturity date of the CenterPoint Facility has been extended from
October 2003 to June 30, 2005.
o The $1.2 billion in mandatory prepayments that would have been required
this year (including $600 million due on February 28, 2003) have been
eliminated.
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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 81% 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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o At current credit ratings, pricing for loans under the Second Amendment
remains the same as under the original CenterPoint Facility.(2)
To provide additional security to the lenders, CenterPoint has
committed, subject to the Commission's approval under the 1935 Act, to grant the
banks a security interest in its 81% stock ownership of Texas Genco. If the
Company is unable to provide that security in a timely manner, the interest
rates will be increased by 25 basis points beginning May 28, 2003.
As additional compensation to the banks for the extended
maturity and the elimination of the mandatory prepayments, CenterPoint has
committed under the Second Amendment to grant the banks, on or before May 28,
2003, warrants to purchase 10 percent, on a fully diluted basis, of the
Company's common stock. The exercise price for the warrants would be equal to
the greater of (i) $6.56 or (ii) 110 percent of the closing price on the New
York Stock Exchange on the date the warrants are issued. The warrants would be
issued upon receipt of Commission approval and would remain outstanding for four
years. They would not, however, be exercisable for a year after issuance.
CenterPoint has the opportunity to reduce or extinguish the warrants to the
extent it reduces the bank facility during 2003 by specified amounts.(3)
The warrants and the underlying common stock would be
registered with the Commission and could be exercised either through the payment
of the purchase price or on a "cashless" basis under which CenterPoint would
issue a number of shares equal to the difference between the then-current market
price and the warrant exercise price. Issuance of the warrants is also subject
to obtaining Commission approval under the 1935 Act. If Commission approval to
issue the warrants is not obtained on or before May 28, 2003, CenterPoint is
obligated to provide
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(2) CenterPoint has agreed to pay the banks an extension fee of 75 basis
points on the amounts outstanding under the bank facility on October 9, 2003,
the maturity date of the original CenterPoint Facility. CenterPoint also paid
$41 million in fees that were due on February 28, 2003 and agreed to accelerate
payment of $20 million in fees that were otherwise due on June 30, 2003, under
the terms of the existing facility.
(3) To the extent that the Company reduces the bank facility by up to $400
million on or before May 28, 2003, up to half of the warrants will be
extinguished on a basis proportionate to the reduction in the credit facility.
To the extent half of the warrants are not extinguished on or before May 28,
2003, they will vest and become exercisable in accordance with their terms.
Whether or not the Company is able to extinguish warrants on or before May 28,
2003, the remaining 50 percent of the warrants will be extinguished, again on a
proportionate basis, if the Company reduces the bank facility by up to $400
million by the end of 2003.
It is CenterPoint's plan to eliminate the warrants entirely before they vest by
accessing the capital markets to fund the total payments of $800 million during
2003. In March, 2003, Centerpoint reduced the bank facility by $50 million.
Because, however, of current financial market conditions and uncertainties
regarding such conditions over the balance of the year, there can be no
assurance that the Company will be able to extinguish the warrants or to do so
on favorable terms.
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the banks equivalent cash compensation over the term that the warrants would
have been exercisable (to the extent they are not otherwise extinguished).
In the Second Amendment, CenterPoint also agreed that its
quarterly common stock dividend will not exceed $0.10 per share.(4) On February
28, 2003, CenterPoint's board of directors declared a quarterly dividend of
$0.10 per share of its outstanding common stock, payable on March 31, 2003 to
shareholders of record as of the close of business March 12, 2003.
The Second Amendment represents a significant milestone for
CenterPoint, allowing it 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. The reaction from the
markets and the rating agencies has been strongly positive. On March 4, 2003,
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P")
affirmed its ratings on CenterPoint and its subsidiary companies and removed
them from CreditWatch with negative implications. S&P explained:
The ratings affirmation reflects CenterPoint's successful
negotiation of an amendment to its existing $3.85 billion
credit facility.
* * * * *
The revised terms of the $3.85 billion bank loan should
substantially enhance CenterPoint's ability to efficiently
access the capital markets by providing financial stability
during the transition period to 2005, by which time the
company expects to recover its investment in generating assets
and return to a debt level more typical for a regulated
utility. Standard & Poor's
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(4) If the Company has not reduced the bank facility by a total of at least
$400 million by the end of 2003, of which at least $200 million has come from
the issuance of capital stock or securities linked to capital stock (such as
convertible debt), the maximum dividend payable during 2004 and for the balance
of the term of the facility is subject to an additional test. Under that test,
the maximum permitted quarterly dividend will be the lesser of (i) $0.10 per
share or (ii) 12.5 percent of CenterPoint's net income per share for the twelve
months ended on the last day of the previous quarter.
The Second Amendment provides that proceeds from capital stock or indebtedness
issued or incurred by CenterPoint or its subsidiaries must be applied (subject
to certain limited exceptions) to repay bank loans and reduce the bank facility.
Similarly, cash proceeds from the sale of assets of more than $30 million or, if
less, a group of sales aggregating more than $100 million, must be applied to
repay bank loans and reduce the bank facility, except that proceeds of up to
$120 million can be reinvested in CenterPoint's businesses.
Page 3
believes that CenterPoint has sufficient liquidity to meet its
consolidated working capital needs.
CenterPoint Energy Ratings affirmed, Off Watch; Outlook Stable (published March
4, 2003) (a copy is attached as Exhibit G-20). Also, on April 4, 2003, Fitch,
Inc. ("Fitch") revised the Rating Outlook for CenterPoint (BBB-) to "stable"
from "negative."
The Second Amendment has also enhanced the ability of
CenterPoint and its Subsidiaries to access the capital markets. Since the Second
Amendment was executed, these companies have successfully engaged in $1.7
billion in capital markets transactions.
On March 18, 2003, the T&D Utility issued General Mortgage
Bonds totaling over $762 million, comprising $450 million 10-year bonds with a
coupon rate of 5.7 percent, and $312.275 million 30-year bonds with a coupon
rate of 6.95 percent. Proceeds are being used to repay $150 million of medium
term notes that matured on April 21, 2003, to redeem $312.275 million of First
Mortgage Bonds and to repay $279 million of a $537 million intercompany note to
CenterPoint.(5)
On March 25, 2003, GasCo issued $650 million of 7.875 percent
senior unsecured notes. A portion of the proceeds were used to retire $260
million of GasCo's 6 3/8 percent Term Enhanced ReMarketable Securities
("TERMS"). Proceeds were also used to extinguish a $350 million bank revolving
credit facility that was due to expire on March 31, 2003.
On April 14, 2003, GasCo issued an additional $112 million of
7.875% senior unsecured notes. Proceeds were used to retire $100 million of
TERMS and to pay costs associated with the refinancing of the TERMS. The
remaining $140 million of TERMS are due to be refinanced or remarketed in
November 2003.
In addition, GasCo closed a $200 million revolving credit
facility which will be used for working capital needs. This 364-day facility has
a drawn cost of LIBOR plus 250 basis points at existing credit ratings.
On April 9, 2003, $175 million of tax-exempt bonds were
remarketed. CenterPoint, which had owned the bonds since the fourth quarter of
2002, has the obligation to make installment payments sufficient to pay debt
service on the remarketed bonds. Bonds aggregating $100 million have a 2018
maturity and an interest rate of 7.75%. Bonds aggregating $75 million have a
2029 maturity and an interest rate of 8%. Proceeds from the remarketing were
used to repay bank debt.
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(5) Part of the proceeds from this repayment were used by CenterPoint to
repay bank loans and permanently reduce the CenterPoint Facility by $50 million.
Page 4
B. REQUESTED AUTHORIZATION
CenterPoint is seeking authority to pledge the stock of Texas
Genco in connection with refinancing of approximately $3.85 billion in
CenterPoint debt.(6) CenterPoint is also seeking authority to issue warrants
under the terms and conditions outlined above.
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 December 31, 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 any remaining
debt at the parent level would cease to be secured.(7)
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(6) Any borrowings under the proposed financing will be subject to and
included in the Financing Limit.
(7) 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 in connection with the proposed security interest, therefore,
provides 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.
Page 5
As explained above, the lenders have required that CenterPoint
provide warrants (or the economic equivalent thereof). The July Order grants
CenterPoint the authority to issue convertible debt securities. CenterPoint is
seeking authority herein to issue warrants to purchase the common stock of the
Company consistent with Commission precedent and the terms and conditions of the
July Order.(8)
The financing transactions are otherwise consistent with and
subject to the terms and conditions as set forth in the July Order.(9)
Execution of the Second Amendment has clearly placed the
Company in a stronger financial position than it was previously. The pending
requests, which are intended to minimize the cost and impact of financing are
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).
C. BACKGROUND
1. Generally
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In the event that Reliant Resources does not exercise its option and CenterPoint
is otherwise unable to sell its interest in Texas Genco (which would similarly
involve a release of the liens), the proposed secured facility would expire, and
the associated liens would be released, in June 2005.
(8) As discussed infra, the documentation for the warrants provides that,
upon exercise of such rights, (i) no one lender will own, control, or hold with
power to vote five percent or more of the outstanding common stock of
CenterPoint, and (ii) the lenders will 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 policies of CenterPoint.
(9) The July Order provides that the effective cost of money on debt
financings will not exceed the greater of 500 basis points over the comparable
term London Interbank Offered Rate or "market rates available at the issuance to
similarly situated companies with comparable credit ratings for debt with
similar maturities and terms." The effective cost of money in this matter is
less than that 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. 27579 (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 6
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.
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.(10)
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 year ended December 31, 2002, CenterPoint had revenues of $7.9 billion,
and operating income of $1.3 billion. As of December 31, 2002, CenterPoint had
assets totaling $19.6 billion.
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(10) 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
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.
Page 7
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
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 those
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 December 31, 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 generating station with two 1,250 MW nuclear
generating units. The following table contains information regarding the
electric generating assets:
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NET GENERATING CAPACITY
AS OF
GENERATION FACILITIES DECEMBER 31, 2002 (IN MW)
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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
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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 interest. Similarly, if there are
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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.(11)
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.
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(11) Among other things, CenterPoint could conduct an auction of its
remaining interest in Texas Genco.
Texas Genco and its subsidiary companies could issue additional debt subject to
certain conditions: (i) under the 1935 Act, Texas Genco must maintain a minimum
of 30% common equity capitalization, and (ii) in connection with the Second
Amendment, the lenders are limiting to $250 million the amount of borrowing by
Texas Genco or its subsidiary companies, at any one time outstanding.
Texas Genco is currently pursuing the possibility of obtaining financing at the
Texas Genco level. The proceeds of the financing, which is expected to be
secured by a pledge of the assets of Texas Genco, will be used to repay existing
intrasystem indebtedness and to provide working capital for Texas Genco. Such
financing would be in compliance with the terms and conditions of the July
Order, which authorizes Texas Genco to issue secured and unsecured debt in an
amount up to $500 million at any one time outstanding during the Authorization
Period. While the specific amount of the proposed financing has not yet been
determined, Texas Genco undertakes that it will not issue debt in excess of $250
million without additional Commission approval.
Page 10
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.
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.
Page 11
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 an additional non-bypassable
charge assessed to customers taking delivery service from the T&D Utility.
In October 2001, a special-purpose subsidiary of the T&D
Utility issued $749 million of transition bonds to securitize certain
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 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 another special-purpose 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
assets or revenues of CenterPoint or its subsidiary companies (together, the
"CenterPoint System") (other than those of the special purpose transition bond
company), nor would the System's creditors have recourse to any assets or
revenues of the entity issuing the securitization bonds (again other than those
of the special purpose transition bond company). All or a portion of the
proceeds from the issuance of bonds would be used to repay debt of CenterPoint
and its subsidiary companies.(12)
----------
(12) A portion of the proceeds will be used to repay an existing $1.31
billion loan at the T&D Utility and retire the associated General Mortgage
Bonds. Other third-party indebtedness then outstanding at the T&D Utility, such
as callable debt, will also be repaid.
It is contemplated that all or a portion of the proceeds would be transferred to
CenterPoint by means of a combination of dividends and repayment of intercompany
debt from the T&D Utility to Utility Holding, LLC and from Utility Holding, LLC
to CenterPoint. While the specific means of transferring the monies will be
determined based on the then-existing facts and circumstances, it is currently
projected that the T&D Utility will have sufficient capacity to accomplish the
desired transfer.
As a limited liability company organized under Texas law, the T&D Utility may
make distributions unless its liabilities would exceed the fair value of its
assets following the distribution. CenterPoint currently estimates that a
distribution of approximately $2.6 billion may be made from the T&D Utility to
CenterPoint in 2005. The proceeds transferred to CenterPoint will be used to pay
down the bank facilities that are currently being negotiated and other parent
company debt. At the time the transfer is made, CenterPoint projects that the
T&D Utility will have equity of over 53%, excluding securitization debt.
Page 12
5. Financial Condition
a. CenterPoint now projects that it will achieve 30% common
equity capitalization (net of securitization debt) in 2006.
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"). It has been and remains the Company's
goal to achieve the 30% common equity capitalization as soon as practicable. As
a result of the external events described below, the Company's most recent
projections now indicate that the 30% goal will indeed be achieved but over a
slightly longer period of time. Specifically, on the basis of current
projections, it is CenterPoint's intention that the System will achieve equity
capitalization net of securitization debt of 34.4% in 2006 (19.7% if
securitization debt is included) and continue to increase the equity component
thereafter (the "April 2003 projections").(13)
The difference between the June 2002 projections and the April 2003
projections is largely a result of two factors: (i) increased interest expense
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 forward-starting interest rate swaps.(14)
Interest Expense
----------
Applicants will seek such additional authority as may be required in connection
with the transfer of proceeds.
(13) 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. As of
December 31, 2002, the T&D Utility had 38.0% common equity (43.2% net of
securitization debt), Texas Genco, LP had 96.4% common equity, GasCo had 46.0%
common equity and CenterPoint had consolidated common equity capitalization of
11.4% (12.1% net of securitization debt). See Exhibit G-21.1.
If securitization debt is included for purposes of the equity calculation, the
Company's consolidated equity ratio would be approximately 20% (if the
pension-related charge to Other Comprehensive Income is included) at the end of
2006. The question of when the consolidated common equity capitalization
(inclusive of securitization debt) reaches 30% is dependent on a number of
factors, including the rate of amortization of the securitization debt. For
purposes of this discussion, it appears that the 30% level (inclusive of
securitization debt) could be achieved around 2013.
(14) 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."
Page 13
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 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, due to 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 completed its restructuring but 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 had 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 10, 2002, CenterPoint established an amended and
restated agreement for one-year credit facility totaling $4.7 billion with its
existing bank syndicate. The $4.7 billion agreement was composed of two separate
credit facilities. The first was a $3.85 billion, 364-day bank credit facility
at CenterPoint (the "CenterPoint Facility"). Pricing under the CenterPoint
Facility was based on LIBOR rates under a pricing grid tied to the company's
credit rating. Interest rates for the term loans at CenterPoint's then-current
ratings were the LIBOR rate plus 450 basis points.
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 350 basis points for $400 million and 400 basis points for the
next $450 million. Loans under the facility were secured by General Mortgage
Bonds.
Page 14
As part of these agreements, CenterPoint agreed to pay certain
fees, including $50 million at the end of February 2003, and $25 million at the
end of June 2003. In addition, the banks insisted on mandatory commitment
reductions 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 on April 1, 2003 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,
the majority of which would come due on that date. Failure to obtain this
additional borrowing would have enabled the banks to terminate their commitments
as of November 15.
On November 12, 2002, the T&D Utility entered into a new
$1.310 billion collateralized term loan (the "T&D Utility Term Loan"), which
removed the immediate acceleration requirement contained in the October $4.7
billion bank credit facilities. The proceeds were used to repay all amounts
outstanding under the T&D Utility's existing $850 million secured 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, LP 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.(15) The T&D Utility Term Loan is secured by General Mortgage Bonds.
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. In its Form
10-K for 2002, CenterPoint explained:
Primarily due to the decline in the market value of the
pension plan's assets and increased benefit obligations
associated with a reduction in the discount rate, the value of
the plan's assets is less than our accumulated benefit
obligation. As a result, we recorded a non-cash minimum
liability adjustment, which resulted in a charge to other
comprehensive income during the fourth quarter of 2002 of $414
million, net of tax.
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(15) Although significantly higher than previous rates, the interest rates
under the T&D Utility Term Loan 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. 27579 (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 15
Recording a minimum liability adjustment did 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.
With its separation from 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 has also reduced its dividend as discussed above
to a maximum of $0.10 per quarter, a reduction of nearly 40%. Further, as
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. Recently, the
Company established a Process Improvement Office to focus on streamlining and
standardizing processes throughout the System. It is anticipated that effort
will eventually produce cost-savings of $45 million per year. CenterPoint is
also undergoing a series of work force reductions. In 2002, 94 employees of
Texas Genco accepted an early retirement offer. A restructuring of work and
reduction of 198 positions at the T&D Utility is projected to produce annual
savings of $5.4 million in capital costs and $5.7 million in operation and
maintenance costs. The reduction of 68 positions in the information technology
organization is expected to produce annual savings of approximately $5.8
million.
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
Page 16
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. On April 2,
2003, Texas Genco announced that it would extend the mothball status of two
gas-fired generating units totally 926 MW through November 2003. The remaining
six units, totaling 2,470 MW will return to service by June 2003.
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.(16)
c. The Company has successfully met a number of 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. With the execution of the Second Amendment and the extension
of the maturity of the CenterPoint Facility, CenterPoint has eliminated $1.2
billion in prepayments that would have been required in 2003. More importantly,
through the extension of the maturity of the facility into 2005, the Second
Amendment addressed what had been a serious mismatch between debt terms and cash
flows anticipated from the sale of Texas Genco and securitization of stranded
costs.
The Second Amendment also relieves what had been a heavy
reliance on short-term bank financing and recurring need to extend those
maturities. The process was time-consuming and costly with the unanimous consent
of thirty banks required for any extension or significant modification of the
CenterPoint Facility.
Concerns about short-term liquidity had 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)
----------
(16) For example, if the market value determined by the Texas Commission in
2004 through this mechanism were $100 and the total of the regulatory book value
of the Texas Genco assets, plus the other elements to be recovered in the 2004
true up proceeding (e.g., ECOM true up, final fuel reconciliation amounts,
approved environmental expenditures, etc.) were $200, the T&D Utility would be
entitled to recover the difference of $100 over time through the addition of a
competitive transition charge to its delivery rates. Under the securitization
provisions of the Texas restructuring law, the T&D Utility would be entitled to
recover the entire difference of $100 in 2005 by selling its right to the
competitive transition charge to a special purpose entity that would issue
transition bonds secured by the revenues produced by that charge. See Exhibit
G-22.
Page 17
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 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.
Page 18
"CenterPoint Energy Sees Light at the End of the Tunnel," Standard & Poor's
Utilities and Perspective for the week of December 2, 2002.(17) 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." The Second Amendment largely addressed the short-term liquidity
concerns as evidenced by S&P's action on March 4, 2003, removing CenterPoint and
its subsidiaries from CreditWatch with negative implications.(18)
d. With the execution of the Second Amendment and the
grant of the requested relief, the Company will be
able to meet its cash requirements through 2005.
Other than the financings discussed herein, the CenterPoint
System's liquidity and cash requirements for 2003 include the following:
o $167 million of maturing long-term debt;
o approximately $684 million of capital expenditures;
o an estimated $237 million which the T&D Utility is obligated to return to
customers as a result of the Texas Commission's findings of over-mitigation
of stranded costs;(19)
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(17) See Exhibit G-23.
(18) Prior to the execution of the Second Amendment, Moody's Investors
Service, Inc. ("Moody's") had rated the senior unsecured debt of CenterPoint Ba1
with a negative outlook, and Fitch assigned it a rating of BBB- with a negative
outlook. As noted previously, S&P has removed CenterPoint from CreditWatch with
a negative outlook. The outlook at S&P is now stable and the senior unsecured
debt of CenterPoint is rated BBB-. On April 4, 2003, Fitch revised the Rating
Outlook for CenterPoint to "stable" from "negative." A chart setting forth the
ratings for the obligations of CenterPoint and its subsidiaries is attached
hereto as Exhibit G-24.
(19) As of December 31, 2002, in contemplation of the 2004 true-up
proceeding, the T&D Utility had 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 (an amount equal to earnings above a stated overall annual rate of
return on invested capital that was used to recover the investment in generation
assets) plus redirected depreciation, both reversed in 2001. Offsetting this
regulatory asset is a $1.0 billion regulatory liability to refund the excess
mitigation to ratepayers. This estimated recovery is based upon current
projections of the market value of the 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 Commission. The T&D Utility began refunding excess
mitigation credits with January 2002 bills. These credits are to be refunded
over a seven-year period.
Page 19
o remarketing or refinancing of $500 million of GasCo debt;
o expected dividend payments.
CenterPoint and its subsidiary companies expect to meet their capital
requirements through cash flows from operations, bank borrowings and proceeds
from debt and/or equity offerings. They believe that the System's current
liquidity, along with anticipated cash flows from operations and proceeds from
borrowings, including anticipated sales of securities in the capital markets,
will be sufficient to meet cash needs. Indeed, in each year from 2003 through
2007, the Company projects that its internally generated cash will be more than
sufficient to cover its anticipated capital expenditures and other internal
operating cash needs of the CenterPoint system.
CenterPoint expects to sell Texas Genco in 2004, either to
Reliant Resources or to others if the option is not exercised. Proceeds from
such sale, plus proceeds from the securitization in 2004 or 2005 of stranded
costs related to generating assets of Texas Genco and generation-related
regulatory assets are expected to aggregate in excess of $5 billion.
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.
Indeed, 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 restrict 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. With the refinancing of its bank debt, the Company has greater
certainty in meeting its financing needs through the completion of stranded cost
recovery in 2005. That greater certainty should open up better access to the
capital markets that will further enhance the Company's financial health.
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
$120,000.
Page 20
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.
A. GENERALLY
CenterPoint is requesting authority to issue secured debt upon
the terms described herein. The Company is also seeking approval to issue
warrants to purchase the common stock of the Company consistent with Commission
precedent.(20) The Company believes that such authorization would help to ensure
continued access to the capital markets on acceptable terms and assure the
liquidity that is needed to enable CenterPoint to satisfy its ongoing
obligations.
B. THE PROPOSED FINANCING SATISFIES THE STANDARDS OF THE ACT.
Section 6(a) of the Act, in pertinent part, provides that:
"Except in accordance with a declaration effective under section 7 and with the
order permitting such declaration to become effective, it shall be unlawful for
any registered holding company . . . (i) to issue or sell any security of such
company; or (2) to exercise any privilege or right to alter the priorities,
preferences, voting power, or other rights of the holders of an outstanding
security of such company."
The financing, including both the pledge of Texas Genco stock
and the issuance of warrants, is permissible under Section 7(c)(2)(A) of the Act
because it will be "solely for the purposes of refunding, extending, exchanging,
or discharging" the existing outstanding CenterPoint Facility. In addition,
consistent with Commission precedent, the pledge of Texas Genco stock is
permissible under Section 7(c)(1)(B)(iii) of the Act.
In a number of early cases, the Commission approved secured
financing transactions under Section 7(c)(1)(B)(iii) of the Act, which
authorizes the issuance of "a bond . . . secured by any other assets of the type
and character which the Commission by rules and regulations or orders may
prescribe as appropriate in the public interest or for the protection of
investors." The Commission broadly interpreted the term "bond" to apply to a
variety of debt instruments, including the loan agreements at issue in this
matter:
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(20) 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 21
The note is to be issued pursuant to a loan agreement between
the borrower and the bank setting forth the terms and
conditions on which the security of the loan is to be held and
containing various covenants on the part of the borrower.
Because of that fact and the other circumstances surrounding
the issuance of the note, the Commission deems that the note
constitutes a "bond" within the meaning of that word as used
in Section 7(c) and meets the requirement of clause (B)(ii) of
that section.
Southwestern Development Co., Holding Co. Act Release No. 382 (Oct. 28, 1937).
See also International Utilities Corporation, Holding Co. Act Release No. 857
(Aug. 24, 1939) at text accompanying note 17 ("We are of the opinion that the
obligation of General here under consideration meets the requirement of the term
'bond' as used in Section 7(c), notwithstanding the fact that the instrument is
denominated a 'note'"); Ogden Corporation, Holding Co. Act Release No. 2153
(June 29, 1940) ("Secured notes have been found to be 'bonds' within the meaning
of Section 7(c)"), citing North Boston Lighting Properties, 2 S.E.C. 799 (1937);
Southwestern Development, supra; Community Power and Light Co., 4 S.E.C. 951
(1939); International Utilities Corporation, 5 S.E.C. 765 (1939); and Central
and South West Utilities Company, 7 S.E.C. 159 (1940). In those matters, as in
the instant one, the note was to be issued to a "well informed investor, who has
carefully examined the securities proposed as collateral." Ogden Corporation,
supra.
Under this approach, the Commission has permitted the issuance
of parent level secured debt where the standards of Section 7(d) were otherwise
met. See, e.g., Lone Star Gas Corporation, Holding Co. Act Release No. 1244
(Sept. 19, 1938) (authorizing pledge of common stock of subsidiary companies as
collateral for the debentures and bank notes of the registered holding company);
Consolidated Electric and Gas Company, Holding Co. Act Release No. 4769 (Dec.
16, 1943) (permitting, among other things, the pledge by a registered holding
company of the stock of its public utility subsidiary company); New England Gas
and Electric Association, Holding Co. Act Release No. 7973 (Jan. 13, 1948)
(approving the issuance of Series B bonds secured by the common stock of the
public utility subsidiary companies where the Commission acknowledged that it
was not an "appropriate" time to sell common stock). In those matters, as in the
instant one, the requested authority concerned "transactions involved in
carrying out a general program of refunding, upon more favorable terms,
outstanding indebtedness" of a newly-registered holding company. See
Southwestern Development, Holding Co. Act Release No. 1724 (Sept. 13, 1939).
With time companies came to assume what we think of as a more
traditional capital structure and the need for such relief faded. As late as
1958, however, the Commission was still citing these decisions as precedent:
In general, in the case in which we have approved under
Section 7(c)(1)(B)(iii) the issuance of holding company debt
securities secured by the common stock of subsidiaries, the
nature of and the circumstances surrounding the proposed debt
issue and the proposed security - such as the absence of
substantial debt or other
Page 22
senior securities in the subsidiaries, the short maturity of
the proposed securities or the likelihood of their early
retirement - have been such as to satisfy us that the public
and investor interests were being appropriately safeguarded.
Eastern Utilities Associates, 38 S.E.C. 728 (Dec. 15, 1958).
The Commission's reluctance until recently to permit any
long-debt at the parent level reflects an institutional concern about the
pyramiding that occurs when senior securities are issued by a holding company
whose sole or principal assets consists of the securities of its subsidiary
companies. See generally Section 1(b) of the Act. In this regard, Section 7(c)
of the Act was based upon the recommendations of the National Power Policy
Committee that:
There should be an end to the pyramiding of holding-company
securities. Except for necessary discretionary power in the
Commission in the case of refunding issues, new securities
should be limited to par value common stock, with appropriate
voting rights, and to first-lien bonds, i.e., bonds having a
first lien either on the physical assets of the issuer or upon
first-mortgage bonds of operating subsidiaries.
Sen. Rep. 621, 74th Cong., 1st Sess. 59 (emphasis added). Against this
background, the Commission has explained:
The addition to Section 7(c)(1)(B) of subparagraph (iii) did
not reflect an intention by Congress to permit pyramiding. It
embodied the specific requirement that we find the security
for proposed bonds to be of a type and character appropriate
in the public interest and for the protection of investors. It
is apparent that where pyramiding would result from the
issuance of debt securities by a holding company the
protection of the public and investor interests requires that
the collateral be such that under the circumstances the
speculative element which is inherent in holding company
senior securities based upon the junior equity of subsidiaries
will be eliminated or minimized.
Eastern Utilities Associates, supra.
In this matter, the collateral - CenterPoint's retained
interest in Texas Genco - is "such that under the circumstances the speculative
element which is inherent in holding company senior securities based upon the
junior equity of subsidiaries will be eliminated or minimized." Id. As discussed
previously, Texas Genco - although still a "public-utility company" within the
meaning of the Act - is not a traditional utility. It was formed in compliance
with the requirements of the Texas restructuring law and it has always been
CenterPoint's plan to sell or otherwise monetize Texas Genco and use the
proceeds to reduce system debt.
Page 23
As required by Commission precedent, the institutional lenders
in the CenterPoint bank group are well-informed investors, who have carefully
examined the securities offered as collateral. Their interests are
well-protected under the Second Amendment to the CenterPoint Facility. Among
other things, there is a contractual limit of $250 million on the amount of debt
that can be issued by Texas Genco and its subsidiary companies, as compared to
the estimated $1.5 billion market value of the Texas Genco assets. Cf. Eastern
Utilities, supra, citing Cities Service Power & Light Co., 16 S.E.C. 461, 474
(1944) and Derby Gas & Electric Corp., 23 S.E.C. 375, 385 (1946).
In addition, the secured interest in this matter will be of
short duration. Either it will be released in early 2004 in connection with the
sale of Texas Genco or, in the worst case, the underlying facility will expire
by its terms in June 2005. Cf. Eastern Utilities, supra, citing Central and
Southwest Utilities Co., 7 S.E.C. 159, 165 (1940). Further, the banks have the
benefit of the July Order under which Texas Genco must maintain a minimum of 30%
common equity capitalization. As of December 31, 2002, Texas Genco had 96%
common equity capitalization.
It must be noted that Section 7(c)(1)(B)(iii) is not the
exclusive means by which the Commission can grant the requested authority. As
noted in the legislative history quoted above, Congress expressly gave the
Commission discretionary authority to permit this type of financing "in the case
of refunding" outstanding securities. Sen. Rep. No. 721, supra. To that end,
Section 7(c)(2)(A) provides for a transaction such as the pledge of Texas Genco
stock because it will be "solely for the purposes of refunding, extending,
exchanging, or discharging" the existing outstanding CenterPoint Facility.
Accord Republic Service Corporation, Holding Co. Act Release No. 443 (Nov. 20,
1936); Southwestern Development, Holding Co. Act Release No. 1724 (Sept. 13,
1939).
As illustrated by the precedent, the Commission has discretion
to grant the requested authorization where, as explained below, the standards of
Section 7 are otherwise met. In other contexts, the Commission has explained:
The Act does not require us strictly to confine the holding
company's structure to one single class of security, which
would be the ultimate, if unrealistic, result of the
simplification process if carried to a logical conclusion.
This proposal does, of course, introduce a complexity into the
corporate structure, but, if it is otherwise justified, as we
think it is, it does not introduce therein an undue
complexity.
Middle South Utilities, Inc., Holding Co. Act Release No. 14367 (Feb. 7, 1961)
(discussing the proposed issue of restricted stock options). As discussed at
length elsewhere in this filing, CenterPoint management believes that the pledge
of Texas Genco stock under the Second Amendment represents a significant
milestone for CenterPoint, allowing it 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.
The reaction from the markets and the rating agencies has been strongly
positive. On March 4, 2003, S&P affirmed
Page 24
its ratings on CenterPoint and its subsidiary companies and removed them from
CreditWatch with negative implications; on April 4, 2003, Fitch did the same.
Reliance on Section 7(c)(1)(B)(ii) may be particularly
appropriate in this matter because comparisons can be drawn between CenterPoint
and the holding companies considered by the Commission in the early days of its
administration of the Act. CenterPoint perhaps is a step ahead in that, unlike
the early registered systems (and, indeed, unlike many systems today), it has
shed its major nonutility operations. Of interest here, like the early
registered holding companies, CenterPoint has a plan to achieve a more
traditional capital structure within a reasonably short period of time. It has
always been CenterPoint's stated intention to monetize Texas Genco as part of
the Business Separation Plan approved in December 2000 by 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.
No State commission has jurisdiction over the proposed
transaction. The standards of Section 7(g) are met.
If the standards of Sections 7(c) and 7(g) are satisfied, the
Commission "shall" permit a declaration regarding the issue or sale of a
security to become effective unless the Commission makes certain findings
described in Section 7(d). None of these problems exists in connection with the
proposed financing transaction:
(1) NO ADVERSE FINDING IS REQUIRED UNDER SECTION 7(d)(1)
BECAUSE THE PROPOSED FINANCING TRANSACTION, INCLUDING THE PLEDGE OF THE TEXAS
GENCO STOCK AND THE ISSUANCE OF WARRANTS, IS REASONABLY ADAPTED TO THE SECURITY
STRUCTURE OF CENTERPOINT AND OTHER COMPANIES IN THE CENTERPOINT SYSTEM.
As discussed above, the Second Amendment has relieved
CenterPoint's short-term liquidity concerns by extending the maturity date of
the CenterPoint Facility and by eliminating mandatory prepayments that would
have been required this year. In order to meet its obligations under the Second
Amendment in the most cost-effective way possible, CenterPoint has agreed,
subject to Commission approval, to pledge the stock of Texas Genco in support of
the underlying $3.85 billion debt obligation.
It is important to note that the pledge of the Texas Genco
stock is not being made in connection with CenterPoint taking on any additional
debt, but is being made solely in connection with extending the maturity date of
pre-existing debt. Thus, the pledge will not increase CenterPoint's debt
obligations. 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 the granting of a security interest in the Texas Genco
stock to certain creditors would not prevent the full payment of other
CenterPoint creditors.(21)
----------
(21) Filed under separate cover with a request for confidential treatment
as Exhibit G-25 is an opinion dated December 4, 2002, from Houlihan Smith &
Company, Inc. to CenterPoint Energy, Inc. confirming that, upon completion of
the January 2003 distribution to shareholders of approximately 19% of the
outstanding common stock of Texas Genco: (i) on a pro forma basis, the fair
value and present fair saleable value of CenterPoint's assets would exceed (x)
CenterPoint's stated liabilities and identified contingent liabilities
(discounted by the percentage of probability that they would occur) plus (y)
$3,050,000, the amount of CenterPoint's stated capital, (ii) CenterPoint should
be able to pay its debts as they become due in the ordinary course of its
business, and (iii) the capital remaining in CenterPoint after the Texas Genco
distribution would not be unreasonably small for the business in which
CenterPoint is engaged.
As of December 31, 2002, CenterPoint had assets totaling $19.6 billion,
liabilities of $18.2 billion and shareholders' equity of $1.4 billion.
Page 25
The pledge of Texas Genco stock will not change the priority
of CenterPoint's payment obligations. The obligations under the CenterPoint
Facility are senior obligations of CenterPoint currently and will remain senior
obligations, with or without the pledge. The pledge will not increase the risk
of default on any of the CenterPoint System's other obligations. To the
contrary, the pledge will support an extension of the maturity date of the
CenterPoint Facility needed to eliminate what would otherwise have been serious
short-term liquidity concerns. The obligations under the CenterPoint Facility
will be secured to the extent of the value of the Texas Genco stock and
unsecured as to the remainder. None of the other documents governing the
system's other borrowings prohibit the issuance of secured debt by
CenterPoint.(22) Indeed, under the terms of their indentures certain
pre-existing secured debt migrated to CenterPoint as a result of the
restructuring authorized by the July Order.
In the event of a default, the lenders under the CenterPoint
Facility will be able to foreclose against a specific asset, that is, the Texas
Genco stock, in partial satisfaction of the underlying debt. Similarly, the
holders of collateralized pollution control bonds can look to their security,
First Mortgage Bonds or General Mortgage Bonds issued by the T&D Utility. The
lenders under the CenterPoint Facility currently have a senior unsecured debt
that is pari passu with other senior unsecured debt including uncollateralized
pollution control bonds, trade payables and other unsecured liabilities. If the
pledge is granted, the lenders will continue to have a senior unsecured debt for
the amount by which the obligation under the CenterPoint Facility exceeds the
value of the Texas Genco stock. By their terms, zero-premium exchangeable
subordinated notes and debentures issued to trusts issuing trust preferred
securities are junior in right of payment to all senior indebtedness. All such
creditors would have to be paid in full before value is made available to
shareholders in any bankruptcy or liquidation of CenterPoint.
The early cases focused as well on the protection of the
secured creditor. The value of the pledge of Texas Genco stock could be
diminished if, for example, the Company were to issue excessive amounts of debt
at the Texas Genco level. To that end, the lenders in connection with the Second
Amendment have placed a contractual limit of $250 million on the amount of debt
that can be issued by Texas Genco and its subsidiaries (as compared to the
estimated $1.5 billion market value of Texas Genco assets).
----------
(22) Exhibit G-26 provides a description of existing system debt and a
discussion of priorities with respect to same.
Page 26
The Division of Investment Management, in its June 1995
report, The Regulation of Public-Utility Holding Companies, noted that the
financial industry has changed significantly since 1935.
In part because of their liabilities under the Securities Act,
underwriters now conduct "due diligence" activities when they
underwrite a securities offering. Rating agencies scrutinize
the finances of utility holding companies; a favorable rating
is generally considered essential for a public-debt offering.
Institutional investors have become considerably better
informed and more sophisticated. Individual investors have the
benefit, whether directly or indirectly, of thorough analysis
by industry experts.
The securities provisions of the Holding Company Act impose
costs. Although the Division strives to process financing
applications as quickly as possible, the process of seeking
and obtaining SEC approval inevitably creates delays. . . .
Regulatory delay may also prevent a registered holding company
from issuing such securities on the most favorable terms,
thereby depriving customers and investors of the benefits of
efficient financing.
So too in this matter, CenterPoint faces the prospect of approximately $10
million increased annual interest charges if it is unable to obtain timely
approval to pledge the stock of Texas Genco.
This relief requested is similar to but narrower than that
granted in a series of orders involving General Public Utilities Corporation
("GPU") in the aftermath of Three Mile Island. As a result of a major accident
at Three Mile Island nuclear generating plant, the members of the GPU system
were purchasing large amounts of electric energy to supply the needs of their
customers. In General Public Utilities Corporation, Holding Co. Act Release No.
21107 (June 19, 1979), the Commission authorized GPU and its three electric
utility subsidiaries to enter into two loan agreements -- one revolving credit
agreement with respect to which all four applicants were borrowers and a term
loan agreement pursuant to which GPU was the sole borrower. Pursuant to the
revolving credit agreement, GPU, the parent, was authorized to borrow up to $150
million. GPU's term loan, in the amount of $39 million outstanding at such time,
had initially been borrowed on an unsecured basis, in order to redeem certain of
its debentures then outstanding.(23) GPU sought to amend its term loan, which
continued to be a separate obligation of GPU, to conform to the terms of the
revolving credit agreement. The Commission authorized GPU to secure its
obligations under the revolving credit agreement, under the term loan and in
respect of certain guarantees of loans to GPU Service Corporation, by a pledge
of the common stock of its electric utility subsidiaries and its service company
subsidiary. The electric utilities also secured their obligations under the
revolving credit agreement with certain of their respective assets, including
first mortgage bonds. The
----------
(23) General Public Utilities Corp., Holding Co. Act Release No. 19778
(Dec. 1, 1976) and Holding Co. Act Release No. 20965 (March 21, 1979).
Page 27
Commission found the proposed borrowings to be "for urgent and necessary cash
requirements of applicants' operations as public utility companies, or, in the
case of GPU, as the parent". This financing structure, with secured bank
facilities at GPU, as well as its electric utility companies, continued for many
years. The Commission authorized amendments, extensions, renewals and
replacements of such secured bank facilities through 1983.(24)
The request in the instant matter is narrower than that of GPU
because Applicants are asking only to pledge the stock of Texas Genco, an entity
that has no captive retail customers. Cf. Allegheny Energy, Inc., Holding Co.
Act Release No. 27579 (Oct. 17, 2002) (authorizing Allegheny Energy Supply
Company, LLC to issue debt secured by, among other things, the stock of its
generating company subsidiaries). In Allegheny, as in the instant matter, 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. While it is true that the definition of "electric-utility company"
does not distinguish between traditional vertically-integrated utilities and the
generation-only subsidiaries at issue in this matter and in Allegheny, we
believe there is a significant difference between the two in terms of potential
detriment to the interests of consumers, a protected interest under the Act.
In addition to the GPU orders, there is a long line of orders
from 1944 through 1979, in which the Commission authorized The Potomac Edison
Company ("Potomac Edison"), at the time a registered holding company and
electric utility subsidiary company, to issue collateral trust bonds pursuant to
a collateral trust indenture.(25) The collateral trust bonds were secured by a
first lien on all of the properties and franchises of Potomac Edison, with minor
exceptions provided for in the indenture, as well as a pledge of all the
securities owned by Potomac Edison of its four electric utility subsidiaries.
As Potomac Edison made additional investments in its
subsidiaries by purchasing additional shares of such subsidiaries, such shares
were pledged to secure Potomac Edison's obligations on the collateral trust
bonds, whether or not such investment was financed with
----------
(24) General Public Utilities Corp., Holding Co. Act Release No. 21276
(Oct. 30, 1979), Holding Co. Act Release No. 21410 (Jan. 28, 1980), Holding Co.
Act Release No. 22211 (Sept. 30, 1981), Holding Co. Act Release No. 22790 (Dec.
21, 1982), Holding Co. Act Release No. 23072 (Sept. 26, 1983) and Holding Co.
Act Release No. 23079 (Sept. 30, 1983).
(25) The Potomac Edison Company, Holding Co. Act Release No. 5362 (Oct. 20,
1944), Holding Co. Act Release No. 8683 (Nov. 29, 1948), Holding Co. Act Release
No. 10467 (March 26, 1951), Holding Co. Act Release No. 13458 (April 30, 1957),
Holding Co. Act Release No. 15018 (Feb. 26, 1964), Holding Co. Act Release No.
15442 (April 13, 1966), Holding Co. Act Release No. 16345 (April 15, 1969),
Holding Co. Act Release No. 17105 (April 19, 1971), Holding Co. Act Release No.
17761 (Nov. 14, 1972), Holding Co. Act Release No. 18184 (Nov. 26, 1973),
Holding Co. Act Release No. 18398 (April 29, 1974) and Holding Co. Act Release
No. 21212 (Sept. 10, 1979).
Page 28
proceeds of an issuance of collateral trust bonds.(26) Proceeds of the
collateral trust bonds generally were to be used to finance the construction
program of Potomac Edison and its subsidiaries and to repay indebtedness to its
parent and to others. Yet, in Holding Co. Act Release No. 17761 (Nov. 14, 1972),
the Commission authorized the issuance of $12,000,000 principal amount of
collateral trust bonds, the net proceeds of which were to be used to prepay
short-term bank debt, pay at maturity commercial paper, reimburse for
expenditures for its construction program and working capital and for other
lawful purposes.
More recently, in Public Service Company of New Hampshire,
Holding Co. Act Release No. 26046 (May 5, 1994), the Commission authorized the
extension by Public Service Company of New Hampshire ("PSNH") of a revolving
credit agreement entered into in connection with PSNH's reorganization from
bankruptcy on May 16, 1991, prior to its acquisition by Northeast Utilities on
June 5, 1992. PSNH's obligations under the revolving credit agreement would
continue to be secured by a second mortgage on certain of PSNH's assets. PSNH
represented in that matter that it had explored various options to replace the
facility, but that the terms of such revolving credit agreement were as
favorable to PSNH as any terms PSNH could expect to receive in a new revolving
credit facility. It should be noted that the order was issued at a time when
PSNH's first mortgage bonds had recently been downgraded to below investment
grade and its common equity to total capitalization was 28.3%. In this matter,
the Commission concluded that the applicable provisions of the Act were
satisfied and that no adverse findings were necessary.
(2) THE FINANCING IS REASONABLY ADAPTED TO THE EARNING POWER
OF CENTERPOINT, AS REQUIRED BY SECTION 7(d)(2).
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.
Indeed, 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 has significantly complicated the
Company's current financial condition and limited 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 have combined to place unique pressures on the
Company's financing and restrict its options. Yet it is important to keep in
mind that
----------
(26) See, for example, Holding Co. Act Release No. 9271 (Aug. 12, 1949),
Holding Co. Act Release No. 10467 (March 26, 1951), Holding Co. Act Release No.
10697 (July 26, 1951), Holding Co. Act Release No. 12837 (April 4, 1955),
Holding Co. Act Release No. 13143 (March 29, 1956), Holding Co. Act Release No.
13487 (May 29, 1957), Holding Co. Act Release No. 13759 (May 16, 1958), Holding
Co. Act Release No. 14214 (April 19, 1960), Holding Co. Act Release No. 15074
(May 15, 1964), Holding Co. Act Release No. 15480 (May 19, 1966), Holding Co.
Act Release No. 15962 (February 8, 1968), Holding Co. Act Release No. 16894
(Nov. 9, 1970), Holding Co. Act Release No. 17133 (May 19, 1971), and Holding
Co. Act Release No. 17568 (May 8, 1972).
Page 29
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. With the refinancing of its bank debt, the Company expects to have
greater certainty in meeting its financing needs through the completion of
stranded cost recovery in 2005. That greater certainty should open up better
access to the capital markets that will further enhance the Company's financial
health.
Although the Distribution of Reliant Resources stock has
temporarily reduced the CenterPoint System's common equity, the Distribution was
both necessary and appropriate under the standards of the Act because it had the
effect of reducing the business risk profile of the regulated business. Further,
CenterPoint's capital structure will be improved significantly with the sale of
Texas Genco and securitization of any stranded investment that is anticipated to
occur in 2004. Net of securitization debt, CenterPoint's projected equity
capitalization will be 30% or greater in 2006, and the growth of equity as a
percentage of capitalization is anticipated to continue in subsequent years.(27)
Indeed, in connection with the July Order, the Commission
focused on the long-term financial health of the new registered system. There
are a number of other underlying indicators of financial stability, including:
(i) a growing, stable customer rate base, which the
CenterPoint utilities have served for many years;
(ii) a state regulatory regime which has avoided the
mistakes of other deregulation plans by allowing for
a market adjustment of retail rates;
(iii) positive and substantial cash flow from operations;
and
(iv) the ability, under the Texas Commission orders, to
securitize stranded costs and regulatory assets and
to repay obligations to holders of securitization
bonds through non-bypassable transition charges which
are creatures of state law.
CenterPoint is almost in its entirety a regulated business: (i) it is no longer
responsible for making retail electric sales to customers, as that role is the
responsibility of Reliant Resources' retail segment; (ii) the T&D Utility is
precluded by the Texas Act from selling electricity at retail; and (iii) unlike
the regulated entity under most other deregulation schemes, the T&D Utility has
no obligation to serve as a provider of last resort and only provides the wires
and service to deliver the electricity from the generating company to the retail
provider's customers. Nor does the T&D Utility retain the utility power sourcing
obligation, which has traditionally
----------
(27) In connection with the July Order, Applicants projected that
CenterPoint would have 35% equity capitalization in 2005. As explained more
fully supra, the difference between the June 2002 projections and the April 2003
projections is largely a result of two factors: (i) increased interest expense
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.
Page 30
been the origin of most risk for electric utilities. Generation is the
obligation of separate power generation companies, which incur the risks
associated with obtaining fuel, constructing new generating capacity and selling
power to the retail providers. Although CenterPoint does temporarily retain the
Texas Genco business as a separate subsidiary, it does not have an obligation to
construct additional generation capacity, nor is it responsible for sourcing
power for retail customers.
Under the Texas restructuring law, a regulated utility may
recover any difference between market prices received during 2002 and 2003
through the state-mandated auction process and the Texas Public Utility
Commission's earlier estimates of those market prices.
Given the unique circumstances of this matter, including the
specific protections afforded by Texas law, Applicants believe that the
financing is reasonably adapted to the earning power of CenterPoint, as required
by Section 7(d)(2).
(3) NO ADVERSE FINDING IS REQUIRED UNDER SECTION 7(d)(3)
BECAUSE THE PROPOSED FINANCING IS BOTH NECESSARY AND APPROPRIATE TO THE
ECONOMICAL AND EFFICIENT OPERATIONS OF THE SYSTEM'S LAWFUL BUSINESSES.
As noted above, the execution of the Second Amendment
represents a milestone for CenterPoint. The requested authorization, concerning
the pledge of Texas Genco stock and the issuance of warrants, is intended to
minimize the costs of the associated financing and so provide for the economical
and efficient operations of CenterPoint's duly authorized businesses. There are
significant economic consequences if CenterPoint is unable to obtain the
requested authority in a timely manner. As noted previously, the interest rates
on the $3.85 billion CenterPoint Facility will be increased by 25 basis points
if CenterPoint is unable to grant the lenders a security interest in its 81%
stock ownership interest in Texas Genco on or before May 28, 2003. Further, in
the event that CenterPoint does not have authority to issue the subject warrants
by that date, CenterPoint must provide the banks equivalent compensation. If
such compensation is required to be provided in cash, the amount of any
borrowings necessary to fund those payments could increase the overall debt of
the CenterPoint System and reduce its equity capitalization ratios.
(4) THE FEES AND OTHER REMUNERATION, INCLUDING THE WARRANTS,
IN CONNECTION WITH THE PROPOSED FINANCING TRANSACTION ARE REASONABLE UNDER THE
STANDARDS OF SECTION 7(d)(4).
The lenders are requiring, as a condition of the proposed
refinancing, that CenterPoint provide additional compensation in the form of
warrants (or the economic equivalent thereof) to purchase CenterPoint common
stock. These warrants can be viewed as a fee in lieu of, among other things, the
$1.2 billion in mandatory commitment reductions, i.e., repayments, the banks
would otherwise receive in the first half of 2003. There is also a timing
consideration. By issuing warrants, CenterPoint will be able to provide the
banks an opportunity to receive that increased compensation without burdening
CenterPoint's existing cash or requiring additional borrowings to pay the fees.
To the extent the banks or their successors purchase the underlying stock, the
Company will receive additional equity capital. And, perhaps most importantly,
the Company can extinguish the warrants and thus avoid their dilutive impact
Page 31
by repaying defined amounts of bank debt by milestone dates in 2003. This latter
feature is a particular benefit for both the banks and the Company. To the
extent the uncertainty surrounding repayment of the bank debt is precluding
CenterPoint currently from adequate access to the capital markets, the
refinanced facility should eliminate that uncertainty, and the Company should
gain greater access to the capital markets. With that access, the Company can
repay a significant portion of the bank debt, which is attractive to the banks,
and at the same time, the Company can reduce--or perhaps eliminate--the burden
created by the warrants.
As discussed in the Application, the issuance of warrants
equivalent to 10% of CenterPoint's outstanding common stock does raise a
question concerning the status of the lenders upon the exercise of the
warrants.(28) It is important to remember, first, that the holders have no
voting power until the warrants are exercised. Second, the warrants will be
fairly widely held. There are 27 banks in CenterPoint's bank facility.(29) The
five largest participants each hold less than 10% of the commitments under the
facility. The remaining participants hold smaller commitments. Third, as a
practical matter, it seems unlikely that the banks will actually seek a
long-term ownership position. Their additional compensation will only be
realized if they sell either the warrants or the underlying stock and obtain the
difference between the sales price and their underlying purchase price. Thus the
issuance of warrants, even if the Company is unable to extinguish all of them
before they vest, should not create a concentration of ownership that could
adversely impact the ultimate control of the holding company or its
subsidiaries.
Finally, the documentation will provide that, upon exercise of
such rights, (i) no one lender will own, control, or hold with power to vote
five percent or more of the outstanding common stock of CenterPoint, and (ii)
the lenders will 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.(30)
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(28) The terms and conditions of the warrants have been designed so that
the lenders can rely on Rule 144A under the Securities Act of 1933, as amended,
with respect to transfer of the warrants.
(29) Citibank, N.A. is the Syndication Agent, JPMorgan Chase Bank is the
Administrative Agent and J.P. Morgan Securities Inc. and Salomon Smith Barney,
Inc. are the Sole Lead Arrangers and Bookrunners for the credit agreement.
(30) While the banks will continue to act in concert through the
administrative agents in their activities under the bank facility (which
requires the banks to act by prescribed voting majorities on matters such as
waivers, amendments, defaults, etc.) and perhaps will have to act together in
exercising certain rights related to the warrants (such as the timing for
requiring registration of the underlying stock), they will not act in concert in
their ownership of the underlying stock or in voting the stock.
Page 32
(5) THE TERMS AND CONDITIONS OF THE PROPOSED FINANCING ARE
CONSISTENT WITH THE PUBLIC INTEREST AND THE INTEREST OF INVESTORS AND CONSUMERS.
It is appropriate and necessary under the circumstances that
CenterPoint provide a pledge of the Texas Genco stock and have the authority to
issue warrants as described herein.(31) The pledge will support a financing that
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 provision of a pledge and warrants in support of
the Second Amendment are the most viable and efficient approach for meeting
CenterPoint's refinancing obligations.
Market conditions foreclosed certain other options. For
example, it had originally been 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 its 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.
At the time the Second Amendment was executed, market
conditions had also largely foreclosed the ability of CenterPoint to issue
additional unsecured debt on reasonable terms. CenterPoint explored various
options available to provide the necessary funding and was advised by its
financial advisors and by prospective lenders that, given current market
conditions, the Company would be required to provide collateral to secure the
debt in order to obtain such funds on reasonable terms (as evidenced by the 25
basis point penalty if CenterPoint is unable to provide a pledge of Texas Genco
stock).
Furthermore, as reflected in the financial information
provided in this record, the proposed financing transactions 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 and consumers. CenterPoint further
submits that the applicable provisions of the Act are satisfied and that no
adverse findings are required.
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(31) The debt will not be secured by any securities or utility assets of
the T&D Utility or GasCo.
Page 33
C. 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 and separation from Reliant
Resources authorized in the July Order, CenterPoint had negative retained
earnings as of December 31, 2002. Thus, although CenterPoint's aggregate
investment (as defined in Rule 53(a)(1)(i)), in EWGs and FUCOs as of December
31, 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.
D. RULE 24 REPORTS
The Applicants are subject to Rule 24 reporting requirements
under the July Order and will continue to comply therewith.
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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. 4 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 May 28, 2003.
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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.
EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
Exhibit G-20 Press release from Standard and Poor's, a division of
The McGraw-Hill Companies, Inc. (March 4, 2003).
Exhibit G-21 Chart presenting equity percentages of CenterPoint,
GasCo, the T&D Utility and Texas Genco, LP (as of
September 30, 2002) (previously filed).
Exhibit G-21.1 Chart presenting equity percentages of CenterPoint,
GasCo, the T&D Utility and Texas Genco, LP (as of
December 31, 2002).
Exhibit G-21.2 Chart presenting April 2003 CenterPoint equity
percentage projections with description of
assumptions, (filed in connection herewith under
separate cover with a request for confidential
treatment).
Exhibit G-21.3 Charts presenting February 2003 and June 2002
CenterPoint equity percentage projections (filed in
connection herewith under separate cover with a
request for confidential treatment).
Exhibit G-21.4 Description of effect of warrants on CenterPoint
equity (filed in connection herewith under separate
cover with a request for confidential treatment).
Exhibit G-21.5 Chart presenting CenterPoint equity projections
(filed in connection herewith under separate cover
with a request for confidential treatment).
Exhibit G-21.6 Chart presenting T&D Utility equity projections
(filed in connection herewith under separate cover
with a request for confidential treatment).
Exhibit G-21.7 Chart presenting T&D Utility equity percentage
forecasts (filed in connection herewith under
separate cover with a request for confidential
treatment).
Exhibit G-21.8 Consolidated financial projections for CenterPoint
(filed in connection herewith under separate cover
with a request for confidential treatment).
Exhibit G-22 Sale and True-Up Analysis (filed in connection
herewith under separate cover with a request for
confidential treatment).
Exhibit G-23 "CenterPoint Energy Sees Light at the End of the
Tunnel," Standard & Poor's Utilities and Perspective
for the week of December 2, 2002 (previously filed).
Exhibit G-24 Chart presenting ratings for obligations of
CenterPoint and its subsidiary companies.
Exhibit G-25 Opinion from Houlihan Smith & Company, Inc. to
CenterPoint, dated December 4, 2002 (previously filed
with the Commission under separate cover with a
request for confidential treatment).
Exhibit G-26 Description of existing system debt and a discussion
of priorities with respect to same.
Exhibit H-1 Draft Notice (previously filed).
Financial Statements
FS-6 Statements of Consolidated Operations for Year Ended December
31, 2002 for CenterPoint Energy, Inc. and Subsidiaries
(incorporated by reference to CenterPoint's Form 10-K for year
ended December 31, 2002, File No. 1-31447)
FS-7 Consolidated Balance Sheets for Year Ended December 31, 2002
for CenterPoint Energy, Inc. and Subsidiaries (incorporated by
reference to CenterPoint's Form 10-K for the year ended
December 31, 2002, File No. 1-31447)
Page 36
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.
Page 37
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: May 16, 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.
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