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| CNP > SEC Filings for CNP > Form 10-Q on 28-Oct-2009 | All Recent SEC Filings |
28-Oct-2009
Quarterly Report
The following discussion and analysis should be read in combination with our Interim Condensed Financial Statements contained in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K).
Hurricane Ike
CenterPoint Energy Houston Electric, LLC's (CenterPoint Houston) electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast in September 2008.
As is common with electric utilities serving coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise CenterPoint Houston's transmission and distribution system are not covered by property insurance, but office buildings and warehouses and their contents and substations are covered by insurance that provides for a maximum deductible of $10 million. Current estimates are that total losses to property covered by this insurance were approximately $28 million.
CenterPoint Houston deferred the uninsured system restoration costs as management believed it was probable that such costs would be recovered through the regulatory process. As a result, system restoration costs did not affect CenterPoint Energy's or CenterPoint Houston's reported operating income for 2008 or the first nine months of 2009. In April 2009, CenterPoint Houston filed with the Public Utility Commission of Texas (Texas Utility Commission) an application for review and approval for recovery of approximately $608 million in system restoration costs identified as of the end of February 2009, plus $2 million in regulatory expenses, $13 million in certain debt issuance costs and $55 million in incurred and projected carrying costs, pursuant to the legislation described below.
In April 2009, the Texas Legislature enacted legislation that authorized the Texas Utility Commission to conduct proceedings to determine the amount of system restoration costs and related costs associated with hurricanes or other major storms that utilities are entitled to recover, and to issue financing orders that would permit a utility like CenterPoint Houston to recover the distribution portion of those costs and related carrying costs through the issuance of non-recourse system restoration bonds similar to the securitization bonds issued previously. The legislation also allowed such a utility to recover, or defer for future recovery, the transmission portion of its system restoration costs through the existing mechanisms established to recover transmission level costs. The legislation required the Texas Utility Commission to make its determination of recoverable system restoration costs within 150 days of the filing of a utility's application and to rule on a utility's application for a financing order for the issuance of system restoration bonds within 90 days of the filing of that application. Alternatively, if securitization is not the least-cost option for rate payers, the legislation authorized the Texas Utility Commission to allow a utility to recover those costs through a customer surcharge mechanism.
In its application filed in April 2009, CenterPoint Houston sought approval for recovery of a total of approximately $678 million, including the $608 million in system restoration costs described above plus related regulatory expenses, certain debt issuance costs and carrying costs calculated through August 2009. In July 2009, CenterPoint Houston announced that it had reached a settlement agreement with the parties to the proceeding. Under the terms of that settlement agreement, CenterPoint Houston would be entitled to recover a total of $663 million in costs relating to Hurricane Ike, along with carrying costs from September 1, 2009 until system restoration bonds were issued. The Texas Utility Commission issued an order in August 2009 approving CenterPoint Houston's application and the settlement agreement and authorizing recovery of a total of $663 million, of which $643 million is attributable to distribution service and eligible for securitization and the remaining $20 million is attributable to transmission service and eligible for recovery through the existing mechanisms established to recover transmission costs.
In July 2009, CenterPoint Houston filed with the Texas Utility Commission its application for a financing order to recover the portion of approved costs related to distribution service through the issuance of system restoration bonds. As discussed above, in August 2009, the Texas Utility Commission issued a financing order allowing CenterPoint Houston to securitize $643 million in distribution service costs plus carrying charges from September 1,
2009 through the date the system restoration bonds are issued, as well as certain up-front qualified costs capped at approximately $6 million. In accordance with the financing order, CenterPoint Houston is to place into effect a separate customer credit related to accumulated deferred federal income taxes (ADFIT) associated with the storm restoration costs to be recovered. This separate credit (ADFIT Credit) is to be applied to customers' bills to reflect the benefit of those deferred taxes at a carrying charge of 11.075%. The beginning balance of the ADFIT related to storm costs is approximately $207 million and will decline over the life of the system restoration bonds as taxes are paid on the system restoration tariffs. The ADFIT Credit will become effective on the same date as the tariff for the system restoration charges and will reduce operating income in 2010 by approximately $24 million. CenterPoint Houston expects to issue the system restoration bonds in the fourth quarter of 2009. Assuming system restoration bonds are issued, CenterPoint Houston will recover the distribution portion of approved system restoration costs out of the bond proceeds, with the bonds being repaid over time through a charge imposed on customers. CenterPoint Houston expects to recover the remaining approximately $20 million of Hurricane Ike costs related to transmission service through the existing mechanisms established to recover transmission costs.
In accordance with the orders discussed above, as of September 30, 2009, CenterPoint Houston has recorded a net regulatory asset of $642 million associated with distribution-related storm restoration costs and $20 million associated with transmission-related storm restoration costs. These amounts reflect carrying costs of $50 million related to distribution and $2 million related to transmission through September 30, 2009, based on the 11.075% cost of capital approved by the Texas Utility Commission. The carrying costs have been bifurcated into two components: (i) return of borrowing costs and (ii) an allowance for earnings on shareholders' investment. During the three months and nine months ended September 30, 2009, the component representing a return of borrowing costs of $6 million and $20 million, respectively, has been recognized and is included in other income in our Condensed Statements of Consolidated Income. That component will continue to be recognized as earned until the associated system restoration costs are recovered. The component representing an allowance for earnings on shareholders' investment of $32 million is being deferred and will be recognized as it is collected through rates.
Long-Term Gas Gathering and Treatment Agreements
In September 2009, CenterPoint Energy Field Services, Inc. (CEFS), a wholly-owned natural gas gathering and treating subsidiary of CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC), entered into long-term agreements with an indirect wholly-owned subsidiary of EnCana Corporation (EnCana) and an indirect wholly-owned subsidiary of Royal Dutch Shell plc (Shell) to provide gathering and treating services for their natural gas production from the Haynesville Shale and Bossier Shale formations in Texas and Louisiana. CEFS has also acquired existing jointly-owned gathering facilities from EnCana and Shell in De Soto and Red River parishes in northwest Louisiana.
Under the terms of the agreements, CEFS commenced gathering and treating services immediately utilizing the acquired facilities. CEFS will also expand the acquired facilities to gather and treat up to 700 million cubic feet (MMcf) per day of natural gas from their current throughput of over 100 MMcf per day. If EnCana or Shell elect, CEFS will further expand the facilities in order to gather and treat additional future volumes.
New construction to reach capacity of 700 MMcf per day includes more than 200 miles of pipelines, nearly 25,500 horsepower of compression and over 800 MMcf per day of treating capacity.
Each of the agreements includes volume commitments for which CEFS has exclusive rights to gather Shell's and EnCana's natural gas production.
CEFS estimates that the purchase of existing facilities and construction to gather 700 MMcf per day will cost up to $325 million. If EnCana and Shell elect expansion of the project to gather and process additional future volumes of up to 1 billion cubic feet per day (Bcf), CEFS estimates that the expansion would cost as much as an additional $300 million and EnCana and Shell would provide incremental volume commitments. Funds for construction will be provided from anticipated cash flows from operations, lines of credit or proceeds from the sale of debt or equity securities.
Debt Transactions
On August 13, 2009, Southeast Supply Header, LLC (SESH) issued $375 million of 4.85% senior notes due 2014. SESH used one-half of the proceeds of the notes to repay a construction loan to CERC in the amount of $186 million. CERC Corp. used the proceeds from the construction loan repayment to repay borrowings under its credit facility.
On October 6, 2009, CenterPoint Houston terminated its $600 million 364-day secured credit facility which had been arranged in November 2008 following Hurricane Ike.
On October 7, 2009, the size of CERC Corp.'s revolving credit facility was reduced from $950 million to $915 million through removal of Lehman Brothers Bank, FSB (Lehman) as a lender. Prior to its removal, Lehman had a $35 million commitment to lend. All credit facility loans to CERC Corp. that were funded by Lehman were repaid in September 2009.
On October 9, 2009, CERC amended its receivables facility to extend the termination date to October 8, 2010. Availability under CERC's 364-day receivables facility ranges from $150 million to $375 million, reflecting seasonal changes in receivables balances.
Equity Transactions
During the three months ended September 30, 2009, we received proceeds of approximately $11 million from the sale of approximately 0.9 million common shares to our defined contribution plan and proceeds of approximately $4 million from the sale of approximately 0.3 million common shares to participants in our enhanced dividend reinvestment plan. During the nine months ended September 30, 2009, we received proceeds of approximately $47 million from the sale of approximately 4.1 million common shares to our defined contribution plan and proceeds of approximately $11 million from the sale of approximately 1.0 million common shares to participants in our enhanced dividend reinvestment plan.
We received net proceeds of $148 million from the issuance of 14.3 million shares of our common stock through a continuous offering program during the nine months ended September 30, 2009.
In September 2009, we received net proceeds of approximately $280 million from the issuance of 24.2 million shares of our common stock in an underwritten public offering. Proceeds were used for general corporate purposes, including to repay borrowings under our revolving credit facility and the money pool and to make loans to subsidiaries, including CERC to fund capital investments by CEFS.
Asset Management Agreements
The natural gas distribution businesses of CERC (Gas Operations) entered into various asset management agreements associated with its utility distribution service in Arkansas, Oklahoma, Louisiana, Mississippi and Texas. Generally, an asset management agreement is a contract between an asset holder and an asset manager that strives to maximize the revenue-earning potential of the asset. In these agreements, Gas Operations agreed to release transportation and storage capacity to another party to manage gas storage, supply and delivery arrangements for Gas Operations when the released capacity is not needed and thereby maximize the value of the assets. Gas Operations will be compensated by the asset manager, in part based on the results of the asset optimization, and entering into the asset management agreements will reduce working capital requirements. The agreements are expected, subject to regulatory approval, to commence in the fourth quarter of 2009 and to continue for various terms extending up to 2016.
Gas Operations has filed applications with state regulatory commissions in Arkansas, Louisiana, Mississippi and Oklahoma for approval of the applicable asset management agreements and to retain a share of the proceeds, with the remainder to benefit customers. Commission approval has been obtained in Louisiana, Oklahoma and for one of two agreements in Arkansas. Action is expected by the Mississippi commission in the fourth quarter of 2009. A filing is expected to be made in Texas in the fourth quarter of 2009.
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