ITEM 1. BUSINESS
GENERAL
We are a special purpose Delaware limited liability company whose sole member is CenterPoint Energy Houston Electric, LLC (CenterPoint Houston). We were organized on November 10, 1999, and amended and restated our limited liability company agreement and certificate of formation on October 24, 2001. Our principal purposes are:
a) purchasing the transition property, as described below, established by a financing order from the Public Utility Commission of Texas (Texas Utility Commission);
b) issuing, supporting and servicing one or more series of transition bonds secured by transition property; and
c) engaging in only those other activities incidental thereto and necessary, suitable or convenient thereto.
Our organizational documents require us to operate in a manner such that we should not be consolidated in the bankruptcy estate of CenterPoint Houston in the event that CenterPoint Houston becomes subject to such a proceeding.
We have no employees and have entered into a servicing agreement with CenterPoint Houston (in this capacity, the Servicer). Pursuant to the servicing agreement, the Servicer is responsible for servicing, managing, and receiving transition charges from retail electric customers or retail electric providers (Transition Charges). In addition, we have entered into an administration agreement with CenterPoint Houston pursuant to which CenterPoint Houston performs administrative and operational duties for us.
We purchased the transition property described below and issued Series 2001-1 Transition Bonds (the Transition Bonds) on October 24, 2001, with expected principal repayments ranging from eleven months to twelve years and final maturities of the four classes of Transition Bonds ranging from six years to fourteen years. The specific interest rate and maturity of each class of Transition Bonds is disclosed in Note 3 of the Notes to Financial Statements included in Item 8 of this Form 10-K. The Transition Bonds were issued pursuant to an indenture between us and Deutsche Bank Trust Company Americas (formerly Bankers Trust Company), as trustee.
TRANSITION PROPERTY
The transition property (Transition Property) that we purchased from Reliant Energy, Incorporated (now CenterPoint Houston) includes the irrevocable right to impose, collect and receive, through the Transition Charges payable by retail electric customers within CenterPoint Houston's certificated service area as it existed on May 1, 1999, an amount sufficient to recover the qualified costs authorized in the financing order (Financing Order) issued by the Texas Utility Commission, including the right to receive Transition Charges in amounts and at times sufficient to pay principal and interest and to make other deposits in connection with the Transition Bonds. All revenues and collections resulting from Transition Charges are part of the Transition Property. CenterPoint Houston's qualified costs authorized in the Financing Order approving the issuance of the Transition Bonds include:
- certain of CenterPoint Houston's generation-related regulatory assets, as determined in the Financing Order; and
- certain costs of issuing, supporting and servicing the Transition Bonds.
We purchased the Transition Property from CenterPoint Houston with the proceeds from the issuance of $748.9 million principal amount of Transition Bonds. Prior to January 2002, the Servicer collected the Transition Charges primarily from retail electric customers within CenterPoint Houston's service territory on the Company's behalf. Beginning in January 2002, and in limited circumstances earlier, retail electric customers in CenterPoint
Houston's service territory began to purchase electricity and related services from retail electric providers, rather than from electric utilities. Certain of these retail electric providers were affiliates of CenterPoint Houston through September 30, 2002. Each retail electric provider includes the Transition Charges in its bill to its retail electric customers but is not required to show the Transition Charges as a separate line item or footnote. Each retail electric provider, however, is required to provide annual written notice to its customers that Transition Charges have been included in their bills. The retail electric providers are obligated to remit payments of Transition Charges, less an allowance for charge-offs of delinquent customer accounts, to the Servicer, whether or not the Transition Charges are actually collected from retail electric customers. The Servicer has only limited rights to collect the Transition Charges directly from retail electric customers if a retail electric provider does not remit such payments to the Servicer, but has certain rights against the retail electric provider. Because the amount of Transition Charge collections will largely depend on the amount of electricity consumed by customers within CenterPoint Houston's service territory, the amount of collections may vary substantially from year to year.
Credit enhancement for the Transition Bonds, which includes mandatory periodic review and adjustment to the Transition Charges to be billed and collected from the retail electric customers within CenterPoint Houston's service territory and the allocation of those charges among the various classes of customers, is intended to ensure that sufficient funds are available to make payments of principal and interest on the Transition Bonds as scheduled. The Servicer is required to make a filing with the Texas Utility Commission for an adjustment at least annually to correct any significant undercollection or overcollection of Transition Charges. In addition, if after application of collections in accordance with the indenture, the actual principal balance of Transition Bonds outstanding at the next payment date will be more than 5% higher or lower than the expected principal balance on the expected amortization schedule, interim true-up adjustments may be made, but not more frequently than every six months. The amount of the adjustment will be determined by using a formula established by the financing order approving the issuance of the Transition Bonds. The adjustments will be made to correct any undercollections or overcollections and are intended to provide that the Transition Charges generate amounts sufficient to:
- make timely interest and principal payments on the Transition Bonds;
- pay fees and expenses of the trustee, our independent managers, the administrator and the Servicer, and other fees, expenses, costs and charges;
- reconcile the retail electric provider payments, net of expected charge-offs for delinquent customer accounts; and
- fund the various subaccounts required by the Transition Bond Indenture to their required levels.
CenterPoint Houston is required to true-up Transition Charges annually on November 1st in compliance with the Financing Order adopted in Application of Reliant Energy, Incorporated for Financing Order to Securitize Regulatory Assets and Other Qualified Costs, Docket No. 21665. CenterPoint Houston's most recent true-up filing to adjust Transition Charges was approved by the Texas Utility Commission and became effective November 1, 2004. A link to that filing is available at www.centerpointenergy.com/investors/bond/1,2776,106657,00.html. No information on that or any other website is incorporated by reference into this report. The adjusted Transition Charges are designed to collect $100.5 million during the year ending October 31, 2005.
ITEM 2.
ITEM 2. PROPERTIES
We have no material physical properties. Our primary asset is the Transition Property described above in Item 1 (Business - Transition Property).
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to Instruction I of Form 10-K.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Sale of Unregistered Securities. There is no established public trading market for our equity securities. All of our equity is owned by CenterPoint Houston. We were formed by CenterPoint Houston in November 1999. CenterPoint Houston's acquisition of our membership interests at our formation was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, because no public offering was involved. We have made no other sales of unregistered securities.
Restricted Payments. The indenture governing the Transition Bonds prohibits us from making any distributions from the capital subaccount of the trust established for the Transition Bonds to any owner of our beneficial interests unless no default has occurred and is continuing thereunder and such distributions would not cause the balance of such capital subaccount to decline below 0.50% of the initial principal amount of Transition Bonds issued and outstanding. We will not, except as contemplated by our organizational documents, make any loan or advance credit to, or guarantee, endorse, or otherwise become contingently liable in connection with the obligations, stocks or dividends of, or own, purchase, repurchase or acquire (or agree contingently to do so) any stock, obligations, assets or securities of, or any other interest in, or make any capital contribution to, any other person. We will not directly or indirectly make payments to or distributions from the collection account except in accordance with the Transition Bond Indenture. As of December 31, 2004, we had not made any distributions to our sole member other than interest earned on the capital subaccount paid in accordance with the Transition Bond Indenture.
Bondholders. As of December 31, 2004, the sole record holder of the Transition Bonds was Cede & Co., as nominee of The Depository Trust Company. The Transition Bonds are not listed on any national securities exchange.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to Instruction I of Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
The following is an analysis of our consolidated results of operations in an abbreviated format pursuant to Instruction I of Form 10-K. This analysis should be read in combination with our financial statements included in Item 8 of this Form 10-K.
As discussed above under Item 1 (Business), we are a Delaware limited liability company established in November 1999 for limited purposes. On October 24, 2001 we issued Transition Bonds and used the net proceeds to purchase the Transition Property from CenterPoint Houston. As we are restricted by our organizational documents from engaging in activities other than those described in Item 1 (Business), income statement effects are limited primarily to income generated from the Transition Charges, interest expense on the Transition Bonds, amortization of the Transition Property, debt issuance expenses and the discount on the Transition Bonds, Transition Property servicing and administration fees and incidental investment interest income.
For the year ended December 31, 2004, revenue from Transition Charges was $74.9 million and investment income was $0.3 million. Interest expense of $36.5 million related to interest on the Transition Bonds and amortization expense of $1.5 million related to amortization of debt issuance expenses and the discount on the Transition Bonds. Amortization of the Transition Property was net of regulatory adjustments of $26.5 million in 2004 to defer amortization costs until periods in which Transition Charge revenue is recognized. We recorded administrative expenses of $2.2 million in 2004 primarily due to bad debt expense associated with retail electric providers recorded in the second quarter of 2004 in accordance with the financing order issued by the Public Utility Commission of Texas (Texas Utility Commission) in May 2000 authorizing our issuance of Transition Bonds.
For the year ended December 31, 2003, revenue from Transition Charges was $63.5 million and investment income was $0.3 million. Interest expense of $37.6 million related to interest on the Transition Bonds and amortization expense of $1.6 million related to amortization of debt issuance expenses and the discount on the Transition Bonds. Amortization of the Transition Property was net of regulatory adjustments of $37.5 million in 2003 to defer amortization costs until periods in which Transition Charge revenue is recognized. We recorded administrative expenses of $0.6 million in 2003.
For the year ended December 31, 2002, revenue from Transition Charges was $74.1 million and investment income was $0.2 million. Interest expense of $38.4 million related to interest on the Transition Bonds and amortization expense of $1.7 million related to amortization of debt issuance expenses and the discount on the Transition Bonds. Amortization of the Transition Property was net of regulatory adjustments of $28.0 million in 2002 to defer amortization costs until periods in which Transition Charge revenue is recognized. We recorded administrative expenses of $0.8 million in 2002.
We use collections of Transition Charges to make scheduled principal and interest payments on the Transition Bonds. Transition Charges, together with interest earned on collected Transition Charges, are expected to offset (1) interest expense on the Transition Bonds, (2) amortization of the Transition Property, debt issuance expenses and the discount on the Transition Bonds and (3) the fees charged by CenterPoint Houston for servicing the Transition Property and providing administrative services to us.
The Transition Charges are reviewed and adjusted at least annually by the Texas Utility Commission to correct prospectively any overcollections or undercollections during the preceding 12 months and to provide for the expected recovery of amounts sufficient to timely provide all payment of debt service and other required amounts and charges in connection with the Transition Bonds.
CenterPoint Houston is required to true-up Transition Charges annually on November 1st in compliance with the Financing Order adopted in Application of Reliant Energy, Incorporated for Financing Order to Securitize Regulatory Assets and Other Qualified Costs, Docket No. 21665. CenterPoint Houston's most recent true-up filing to adjust Transition Charges was approved by the Texas Utility Commission and became effective November 1, 2004. The adjusted Transition Charges are designed to collect $100.5 million during the year ending October 31, 2005.
Holders of Transition Bonds may experience payment delays or incur losses if our assets are not sufficient to pay interest or the scheduled principal of the Transition Bonds. Funds for payments depend on the Transition Property and the right to collect the transition charges over a period limited by Texas law to 15 years. In addition, collections depend on the amount of electricity consumed within CenterPoint Houston's service territory. At the time we made our September 15, 2004 debt service payment, funds in the General Subaccount, the Reserve Subaccount and the Overcollateralization Subaccount were insufficient to cover the payment, and approximately $2.5 million was drawn from the Capital Subaccount in connection with that payment. Milder than normal weather during the summer of 2004 (and hence reduced electricity consumption) resulted in Transition Charge collections being insufficient to fund that debt service payment without a draw from the Capital Subaccount. After the September 15, 2004 payment, the aggregate balance in the Overcollateralization Subaccount and the Capital Subaccount was $1.3 million, and the targeted aggregate balance for these accounts was $4.7 million.
Immediately following the March 15, 2005 debt service payment, the aggregate balance in the Overcollateralization Subaccount and the Capital Subaccount was at the targeted aggregate balance for these accounts of $4.8 million, and an additional $3.4 million was held in the Reserve Subaccount.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2003 and 2004, we had outstanding fixed-rate debt aggregating $717.1 million and $675.9 million in principal amount and having a fair value of $753.5 million and $709.1 million, respectively. This fixed-rate debt does not expose us to the risk of loss in earnings due to changes in market interest rates. However, the fair value of this debt would increase by approximately $10.1 million if interest rates were to decline by 10% from their levels at December 31, 2004.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
STATEMENTS OF INCOME AND CHANGES IN MEMBER'S EQUITY
See Notes to the Company's Financial Statements
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
BALANCE SHEETS
See Notes to the Company's Financial Statements
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
STATEMENTS OF CASH FLOWS
See Notes to the Company's Financial Statements
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
CenterPoint Energy Transition Bond Company, LLC (the Company) is a special purpose Delaware limited liability company whose sole member is CenterPoint Energy Houston Electric, LLC (CenterPoint Houston). CenterPoint Houston is a regulated utility engaged in the transmission and distribution of electric energy in a 5,000 square mile area located along the Texas Gulf Coast, including the City of Houston.
The Texas Electric Choice Plan (Texas electric restructuring law), enacted in 1999, authorized competition in the retail and generation markets for electricity beginning in January 2002 and provides for recovery of stranded costs (i.e., the excess of regulatory net book value of generation assets (as defined in the Texas electric restructuring law) over the market value of those assets) and generation-related regulatory assets (as set forth in the Texas electric restructuring law) through irrevocable non-bypassable transition charges assessed on all retail electric customers within a utility's geographical certificated service area as it existed on May 1, 1999 (Transition Charges). The Texas electric restructuring law authorizes the Public Utility Commission of Texas (Texas Utility Commission) to issue financing orders approving the issuance of transition bonds to recover generation-related regulatory assets and stranded costs. The Texas electric restructuring law and the financing order permit an electric utility to transfer its rights and interests in the financing order, including the right to collect Transition Charges pursuant to the Texas electric restructuring law, to a special purpose entity formed by the electric utility to issue debt securities secured by the right to receive revenues arising from the Transition Charges. The electric utility's right to receive the Transition Charges and its other rights and interests under the financing order constitute "Transition Property." The Texas Utility Commission issued a financing order to CenterPoint Houston on May 31, 2000 (Financing Order) that authorized CenterPoint Houston to cause the Company to issue transition bonds (Transition Bonds) in an aggregate principal amount not to exceed $740 million plus up-front qualified costs not to exceed $10.7 million in the aggregate.
The Company was organized on November 10, 1999 under the laws of the State of Delaware for the sole purpose of acquiring and holding the Transition Property to be acquired from CenterPoint Houston. The Company had no operations until October 24, 2001.
On October 24, 2001, the Company issued $748.9 million of Transition Bonds and used the net proceeds to purchase the Transition Property from CenterPoint Houston and pay expenses of issuance. For additional information relating to the Transition Bonds, see Note 3.
CenterPoint Houston's parent company, CenterPoint Energy, Inc. (CenterPoint Energy), is a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended.
The Company is restricted by its organizational documents from engaging in any activity not directly related to the specific purposes for which the Company was created. The Company is a separate and distinct legal entity from CenterPoint Houston, and the Company's organizational documents require it to operate in a manner to avoid consolidation with the bankruptcy estate of CenterPoint Houston in the event CenterPoint Houston becomes subject to such a proceeding. CenterPoint Houston is not the owner of the Transition Property described herein, and the assets of the Company are not available to pay creditors of CenterPoint Houston or any of its affiliates.
(2) SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REGULATION AND REGULATORY ASSETS AND LIABILITIES. The Company's business meets the criteria of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). This accounting standard recognizes the cost based rate making process which may result in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses. The Company's purpose is to purchase the Transition Property, issue one or more series of Transition Bonds secured by the Transition Property and perform any activity incidental thereto. The Transition Charges are designed to provide the necessary revenues to make such payments. Continued applicability of SFAS No. 71 requires that rates be designed to recover specific costs of providing regulated services and products, and that it be reasonable to assume that the Transition Charges are set at levels that will recover an entity's costs and can be charged to and collected from customers. The Company believes it satisfies such requirements, and applies the provisions of SFAS No. 71 to its business.
CASH AND CASH EQUIVALENTS/RESTRICTED FUNDS. For purposes of the Balance Sheet and Statement of Cash Flows, the Company considers investments purchased with a maturity of three months or less to be the equivalent of cash. The trustee under the indenture pursuant to which the Transition Bonds were issued (the Trustee) has established, as provided in the indenture, the following subaccounts for the Transition Bonds:
- The General Subaccount is comprised of collections of Transition Charges and interest earned from short term investments. These amounts accumulate in the General Subaccount until they are transferred from the General Subaccount on each Transition Bond payment date. The General Subaccount had a balance of $23.2 million at December 31, 2004.
- The Reserve Subaccount is maintained for the purpose of holding any Transition Charges and investment earnings (other than investment earnings on amounts in the Capital Subaccount) not otherwise used on the payment dates of the Transition Bonds for payment of principal, interest, fees or expenses, or for funding the Capital Subaccount or the Overcollateralization Subaccount. The Reserve Subaccount had a balance of $4,110 at December 31, 2004.
- The Overcollateralization Subaccount has a target funding level of approximately $3.7 million (0.5% of the initial principal amount of the Transition Bonds), and funding is scheduled to occur ratably over the life of the Transition Bonds. The Trustee may draw from this subaccount if the General Subaccount and Reserve Subaccount are not sufficient on any payment date to make scheduled payments on the Transition Bonds and payments of certain fees and expenses. The Overcollateralization Subaccount had a balance of $409 at December 31, 2004, with a scheduled level of $0.9 million.
- The Capital Subaccount received a deposit of approximately $3.7 million (0.5% of the initial principal amount of the Transition Bonds) on the date of issuance of the Transition Bonds. CenterPoint Houston contributed this amount to the Company. If amounts available in the General, Reserve and Overcollateralization Subaccounts are not sufficient on any payment date to make scheduled payments on the Transition Bonds and payments of certain fees and expenses, the Trustee will draw on amounts in the Capital Subaccount. Approximately $2.5 million was drawn from the Capital Subaccount in connection with the September 15, 2004 interest payment. As of December 31, 2004, the Capital Subaccount had a balance of $1.3 million and is classified as Restricted Funds in the Balance Sheets.
- As of December 31, 2004, cash deposits provided by retail electric providers totaled $2.2 million and are classified as Restricted Cash in the Balance Sheets.
DEBT ISSUANCE COSTS. The costs associated with the issuance of the Transition Bonds are capitalized and are being amortized over the life of the Transition Bonds utilizing the effective interest method.
TRANSITION CHARGES. Beginning on October 25, 2001 and pursuant to the Financing Order, CenterPoint Houston, as Servicer, implemented the non-bypassable Transition Charge on behalf of the Company. The Company records revenue for Transition Charges under the accrual method. These revenues are generally recognized upon delivery of services by CenterPoint Houston to retail electric providers.
The following table shows the aggregate amount of Transition Charges collected by the Company during each month from the date of issuance of the Transition Bonds through December 31, 2004 (in thousands):
In all material respects, each significant retail electric provider (i) has been billed in accordance with the applicable Financing Order of the Texas Utility Commission, (ii) has made all payments in compliance with the requirements outlined in the Financing Order, and (iii) has satisfied the creditworthiness requirements of the Financing Order.
AMORTIZATION. The Transition Property was recorded at acquired cost and is being amortized over twelve years, the life of the Transition Bonds, based on estimated revenue from Transition Charges, interest accruals and other expenses. The Financing Order authorizing the imposition of the Transition Charges and the issuance of the Transition Bonds, limits the terms of the Transition Bonds to no greater than 15 years. In accordance with SFAS No. 71, amortization is adjusted for over/under collection of Transition Charges. Amortization of the Transition Property was net of regulatory adjustments of $28.0 million, $37.5 million and $26.5 million in 2002, 2003 and 2004, respectively to defer amortization costs until periods in which Transition Charge revenue is recognized. The Transition Charges are reviewed and adjusted at least annually by the Texas Utility Commission to correct any overcollections or undercollections during the preceding 12 months and to provide for the expected recovery of amounts sufficient to timely provide all payment of debt service and other required amounts and charges in connection with the Transition Bonds.
INCOME TAXES. The Company is organized as a single member limited liability company and will not be subject to United States federal income tax as an entity separate from CenterPoint Energy. In addition, the Company has received a ruling from the Comptroller of Public Accounts of the State of Texas to the effect that (i) the Company's receipt of the Transition Property, (ii) the Company's receipt of the Transition Charges and (iii) the Company's short-term earnings from investment of the Transition Charges will be excluded from taxable capital and taxable earned surplus for purposes of the Texas franchise tax. Accordingly, there is no provision for income or Texas franchise taxes.
(3) LONG-TERM DEBT
On October 24, 2001, the Company issued $748.9 million aggregate principal amount of its Series 2001-1 Transition Bonds pursuant to the Financing Order. Net proceeds to the Company from the issuance after payment of all allowed costs of issuance payable from bond proceeds were $738.2 million. The Company paid CenterPoint Houston $738.2 million for all of CenterPoint Houston's interest in the Transition Property.
The Transition Bonds are secured primarily by the Transition Property, which includes the irrevocable right to recover, through non-bypassable Transition Charges payable by certain retail electric customers, the qualified costs of CenterPoint Houston authorized by the Financing Order. The holders of the Transition Bonds have no recourse to any assets or revenues of CenterPoint Houston, and the creditors of CenterPoint Houston have no recourse to any assets or revenues (including, without limitation, the Transition Charges) of the Company. CenterPoint Houston 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 CenterPoint Houston and the Company and in an intercreditor agreement among CenterPoint Houston, the Company and other parties.
The source of repayment for the Transition Bonds is the Transition Charges. The servicer collects these non-bypassable charges from retail electric providers in CenterPoint Houston's service territory. The servicer deposits Transition Charge collections into the General Subaccount maintained by the Trustee.
Debt service payments on the Transition Bonds are due semi-annually and are paid from funds deposited daily with the Trustee for the Transition Bonds by CenterPoint Houston as Servicer of the Transition Property. Scheduled final payment dates, final maturity dates and interest rates for the Transition Bonds at December 31, 2004, are as follows:
The following table shows scheduled and actual principal payments on the Transition Bonds from the issuance date through December 31, 2004 (in thousands):
Scheduled principal payments through 2008 for the Transition Bonds outstanding at December 31, 2004 are as follows: 2005 - $46.8 million, 2006 - $54.3 million, 2007 - $59.9 million, 2008 - $65.5 million and 2009 - $73.0 million.
The estimated fair value of the Transition Bonds at December 31, 2004 was $709.1 million.
(4) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under a sale agreement between the Company and CenterPoint Houston dated October 24, 2001, CenterPoint Houston sold the Transition Property to the Company. Pursuant to a servicing agreement entered into between the Company and CenterPoint Houston concurrently with the issuance of the Transition Bonds, CenterPoint Houston is the Servicer of the Transition Property. As the Servicer, CenterPoint Houston manages and administers the Transition Property of the Company and collects the Transition Charges on behalf of the Company. The Company pays a fixed annual servicing fee to CenterPoint Houston for these services. Pursuant to an administration agreement entered into between the Company and CenterPoint Houston, CenterPoint Houston also provides administrative services to the Company. The Company pays CenterPoint Houston a fixed fee for performing these services, plus all reimbursable expenses. The Company recorded administrative and servicing fees of $0.5 million in each of the years 2002, 2003 and 2004.
The Company also entered into an intercreditor agreement with CenterPoint Houston and other parties related to the servicing of the Transition Bonds. In addition, CenterPoint Houston has agreed to indemnify the Trustee under the Transition Bond Indenture on the Company's behalf to the extent such indemnification is not recoverable from the Company as a fixed expense.
Certain debt issuance costs paid by CenterPoint Houston were reimbursed by the Company upon issuance of the Transition Bonds.
In order to obtain the desired ratings on the Transition Bonds, CenterPoint Houston deposited $3 million in a specified reserve account for the benefit of Deutsche Bank Trust Company Americas (formerly Bankers Trust Company), as Trustee, as cash collateral for an indemnification obligation of CenterPoint Houston arising in connection with the issuance of the Transition Bonds. All funds remaining in the specified reserve account less any amounts then due and owing to Deutsche Bank Trust Company Americas will be released to CenterPoint Houston upon final payment of the Transition Bonds.
Subsidiaries of Reliant Energy, Inc. (formerly named Reliant Resources, Inc.) (RRI), a former affiliate of the Company, collect the majority of the transition charges from retail electric customers. The subsidiaries of RRI have at all times been in compliance with the creditworthiness criteria for retail electric providers as set forth in the financing order of the Texas Utility Commission. At December 31, 2004, subsidiaries of RRI had letters of credit aggregating approximately $8.6 million on deposit with the Trustee. As with any retail electric provider, the servicer is expected to direct the Trustee to seek recourse against such letters of credit or alternate form of credit support as a remedy for any payment default that may occur.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of CenterPoint Energy Transition Bond Company, LLC Houston, Texas
We have audited the accompanying balance sheets of CenterPoint Energy Transition Bond Company, LLC (the Company) as of December 31, 2004 and 2003, and the related statements of income and changes in member's equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CenterPoint Energy Transition Bond Company, LLC at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas March 29, 2005
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2004 to provide assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to Instruction I of Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to Instruction I of Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted pursuant to Instruction I of Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to Instruction I of Form 10-K.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ---------- (1) Agreed upon procedures related to securitization financing.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements.
Statements of Income and Changes in Member's Equity Balance Sheets Statements of Cash Flows Notes to Financial Statements Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedules. None.
3. Exhibits. See the Index to Exhibits which appears following the signature page to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, the State of Texas, on the 31st day of March, 2005.
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC (Registrant)
By: /s/ Marc Kilbride ------------------------------------ Marc Kilbride Manager
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 2005.
CENTERPOINT ENERGY TRANSITION BOND COMPANY, LLC
EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX TO EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by a cross (+); all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.