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| CNP > SEC Filings for CNP > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-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 Houston's 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 $17 million.
CenterPoint Houston deferred the uninsured system restoration costs as management believes it is probable that such costs will be recovered through the regulatory process. As a result, system restoration costs did not affect our or CenterPoint Houston's reported net income for 2008 or the first six months of 2009. As of June 30, 2009, CenterPoint Houston had balances of $163 million in property, plant and equipment and $442 million in regulatory assets related to restoration costs incurred through June 30, 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 projected carrying costs, pursuant to the legislation described below. CenterPoint Houston expects to incur additional costs, currently estimated at $12 million, related to Hurricane Ike, principally related to the reconstruction of certain substations on Galveston Island, and will seek to recover those costs through the regulatory process at a later date.
In April 2009, the Texas Legislature enacted legislation that authorizes 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 allows 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 requires 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. The time periods for the Texas Utility Commission to act on the two applications can run concurrently, but the Texas Utility Commission can delay issuing a financing order until it has ruled on the amount of recoverable system restoration costs. Alternatively, if securitization is not the least-cost option for rate payers, the legislation authorizes the Texas Utility Commission to allow a utility to recover those costs through a customer surcharge mechanism.
In accordance with the legislation discussed above, CenterPoint Houston has recorded a regulatory asset of $41 million representing the carrying costs on recoverable system restoration costs for the period from September 12, 2008 through June 30, 2009. CenterPoint Houston will continue to accrue carrying costs until the associated system restoration costs are recovered by CenterPoint Houston, either through rates or through the issuance of system restoration bonds, as discussed above. The carrying costs are based on the cost of capital established by the Texas Utility Commission in CenterPoint Houston's 2001 rate proceeding. In accordance with Statement of Financial Accounting Standards (SFAS) No. 92, "Regulated Enterprises - Accounting for Phase-in Plans," the carrying costs have been bifurcated into two components: (i) return of borrowing costs and (ii) an allowance for earnings on shareholders' investment. The component representing a return of borrowing costs of $14 million has been recognized in the second quarter of 2009 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 $27 million is being deferred and will be recognized as it is collected through rates or, if the system restoration costs are recovered through issuance of system restoration bonds, over the life of those bonds.
In the application it 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. On July 31, 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 will 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 are issued. The Texas Utility Commission is expected to take final action on CenterPoint Houston's application and the settlement agreement in August 2009. 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. Based on the $663 million in total costs that would be approved under the settlement agreement, approximately $643 million, plus certain costs of issuance, are eligible to be recovered through the issuance of system restoration bonds. The exact size of the bond offering will be determined by the Texas Utility Commission in a hearing currently scheduled for September 2009. The Texas Utility Commission's financing order, which would authorize issuance of the system restoration bonds, is expected to contain provisions related to the regulatory treatment of deferred federal income taxes associated with the costs to be recovered. In previous securitization cases, the Texas Utility Commission has reduced the amount of costs eligible for securitization by the benefit of those deferred taxes. 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 will seek to recover the remaining approximately $20 million of Hurricane Ike costs related to transmission service through the existing transmission cost of service process. Although there can be no assurance that the Texas Utility Commission's orders will authorize recovery or securitization of the full amounts set forth in the settlement agreement, we and CenterPoint Houston do not believe the outcome of these proceedings will have a material adverse impact on our or CenterPoint Houston's financial condition, results of operations or cash flows.
Equity Financing Transactions
During the six months ended June 30, 2009, we received proceeds of approximately $36 million from the sale of approximately 3.2 million common shares to our defined contribution plan and proceeds of approximately $7 million from the sale of approximately 0.7 million common shares to participants in our enhanced dividend reinvestment plan.
In February 2009, we entered into a continuous offering program equity distribution agreement with Citigroup Global Markets Inc. (Citi) covering the issuance of up to $150 million of our common stock. Pursuant to that agreement, we issued 13.8 million shares of our common stock during the quarter ended June 30, 2009 through Citi as our sales agent at a weighted average price of $10.51. Proceeds (before expenses) from the issuance of common stock were $145 million. Additionally, we issued 0.5 million shares of our common stock on July 1, 2009 at a weighted average price of $11.04 which provided proceeds (before expenses) of $5 million. Compensation payable to Citi in connection with the issuance of $150 million of our common stock was approximately $2 million.
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